How often have you heard that oft-spoken phrase, “Buy low, sell high”? Sounds sensible, right? Wrong! The problem with this statement is that no one knows what low is, especially in a bear market. The mistaken investment belief that this phrase can actually be defined in stock market terms has cost investors dearly over the years and allowed their losses to grow.
How many times have we heard that a particular stock “looks cheap,” only to see it dive further in price? How many times have we heard the experts (there are none in this business except, as we’ve already said, the market itself) opine that a specific equity represents “great value”—only to see it represent even “greater value” at visibly lower quotes thereafter? And how often do we hear it said that the market is mispricing a certain stock with strong underlying financial credentials, only to witness continued shrinkage in its share price? The opposite can also occur: shares in a stock with few bullish followers that look either fully (or overly) priced may continue to rise smartly over a sustained period.
When someone tells me that they aren’t going to sell a stock because it’s at its low, I ask them how they know that fact. And they invariably respond that the share price is at its low based on its fifty-two-week or yearly price range, or other metric. The problem is that just because a security has had a range of, let’s say, thirty to fifty over the past year and the stock is presently trading at thirty-one, there’s nothing that says the stock can’t fall another 20 percent, 30 percent, even 50 percent or more from there.
What you think is low and what the market thinks is low are two different things. Whenever I hear someone say that their stock is at its low, I can usually assume that it’s going lower. It’s like a troubled relationship that the couple believes can’t get any worse because it’s been so bad for so long. That makes it attractive? The same thinking can be applied on the northerly end, when the investor feels that a share price has reached a peak just because it’s at or near its yearly or historical high. In a primary bull market, you’ll have hundreds of stocks recoding new highs for months (some for multiple months or possibly even several years) on end. A characteristic of a bull market is that what looks high can still go smartly higher, despite views that the share price looks high, extended, overvalued, or overpriced, to quote some overused and misleading terms. So when I hear someone say that a stock should be sold because it’s at its high, I usually think it’s headed higher. On what kind of analytical basis is that to make investment decisions with your hard-earned capital, anyway?
Let me state this clearly and firmly: it’s not what you or I or anyone else says or thinks that determines what high or low is. It’s what the market says, as determined by supply and demand factors.
One last thing: I’ve noticed a contingent of investors who, when faced with a substantial gain and a substantial loss in two different securities, worry more about the former. That’s the wrong approach. My motto is “always worry,” but do so more with those stocks that have moved against you—in other words, the losers. Worry more about what has the greater potential to hurt you. While the “buy low, sell high” slogan is far more popular, I am more comfortable (as long as my chart analysis and risk management discipline support it) with a “buy high, sell higher” mentality. Remember, that first high can actually seem quite low in retrospect during a primary bull market.
(To be continued...)
This excerpt is taken from “Relationship Investing: Stock Market Therapy for Your Money” by Jeffrey S. Weiss. To read other articles of this book, click here. To buy this book, click here.
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