“I just want to figure out how to buy low and sell high!”
I was out grabbing a bite last week when I overheard an exacerbated man at an adjacent table air his dirty investing laundry to his buddy.
I was about to make a wisecrack, but there’s really no way to casually insert your two cents into a stranger’s conversation about investing. So I signed the check and left, thinking that would be the last I would hear about that stupid old cliché.
It wasn’t.
A couple of days later, I was on the phone with a brokerage rep, asking a few questions about new features on his firm’s online platform. The rep was helpful and polite, and he had a few words of wisdom for me as our conversation came to an end.
“Don’t forget to buy low and sell high,” he said.
There it was… again! The old Wall Street adage had crept back into my life twice in only 48 hours.
You might think these are just innocent comments. But you have to understand—I hate“buy low, sell high.” And I certainly don’t think an investment professional should be passing the slogan off to customers as if it were some nugget of stock market wisdom.
So instead of blindly following this tired Wall Street mantra, I have a better strategy to show you today. If you have the guts to follow the spirit of this rule, you should have no trouble beating the pants off the market…
But before I get into the details, I’m going to show you exactly what’s wrong with the conventional wisdom behind “buy low, sell high” thinking.
I know it sounds obvious, but what the hell does “buy low, sell high” even mean? More importantly, how does this Wall Street adage help the average investor make money in the markets?
I have news for you. It doesn’t mean squat. And it won’t help you make money. Might as well advise someone buying lottery tickets to “get the right numbers.”
Of course, it’s simple to look back over the past 20, 30, or even 50 years and pick out the best times to buy and sell stocks. With hindsight as our guide, we would buy stocks the day after the crash of 1987 and ride stocks through the bull market of the 1990s. Or sell our Nasdaq winners before the tech bubble burst and the markets tumbled in 2000.
But in reality, few people did either…
None of us can hop in a time machine with the hopes of buying a dead-certain market bottom. And no one has the ability to look beyond the right margin of the charts.
This is precisely why “buy low, sell high” is so stupid and meaningless. What’s low? What’s high, for that matter? And when do these mysterious opportunities occur? Not only does “buy low, sell high” fail to answer these questions– it also gives bad advice at crucial market turning points.
As an example, let’s imagine a stock on your watch list just fell to a new 52-week low. Judging by our rule to buy low, grabbing this stock as it breaks to the downside is the perfect move. The entire objective is to buy shares on the cheap. Mission accomplished!
But anyone with a shred of market experience will tell you that buying a stock as it posts fresh lows almost always ends in disaster. You might be buying the stock for a low price, but there’s no rule keeping your cheap stock from dropping even lower.
In fact, a stock with enough downside momentum to make fresh lows is more likely to continue to travel lower before it finds higher ground once again. The company is out of favor, making it all the more difficult to attract new buyers. Instead of buying a stock at its true low, you’ve instead picked up shares of a stock that’s just beginning its decline. And it probably still has a long way to go before hitting zero…
On the other end of the spectrum, selling a stock at the high point can become even more difficult without the aid of hindsight to guide your decisions. If a stock you owned began making new highs, the “sell high’ rule would kick in and you would have to prepare to take profits.
But how many times would you have sold Apple, or Microsoft, or Amazon during their marathon runs if you followed that advice? How many times would their new highs have triggered a sell signal? And you probably never would have gotten a chance to buy back into the stock because it always would have appeared too expensive.
So why should anyone sell an investment that’s posting new highs? Unless the market gives you a reason to sell your shares and book the gains, it’s always a good idea to let your winners run. The same market forces that affected our stock hitting new lows are in control of our stock that is making new highs.
If you adjust your thinking a little, you can see how we could also justify replacing “buy low, sell high” with the lesser-known trading mantra “buy high, sell higher.” After all, it’s obviously a smarter decision to buy a name that’s making new highs than it is to sell an outperforming stock, even if you do have a longer-term holding time in mind.
Now that we have selling out of the way, let’s discuss buying…
Forget about the meaningless “buy low, sell high” – and all the other phony Wall Street trading adages. It’s merely a catchy slogan masquerading as investing advice.
It’s time to get down to some true investing wisdom. I’m talking about a powerful, reliable strategy that has been used by some of the greatest investors in the world.
This strategy is simple to use because it relies on one of the most basic and important emotions affecting the markets: fear.
It’s not enough to simply buy a stock when the price is “low.” You need a clear signal — a trigger that will tell you when to buy markets where investors have given up all hope. Every economic indicator (and every analyst) should shun the stock. The company, industry or sector you’re researching should be universally loathed. Negative news stories should outnumber the positive at a rate of 10 to one. That’s how you know fear has truly taken hold.
Once the scales have tipped and everyone has abandoned hope, you’re left with an incredible opportunity. This is when the skilled contrarian investor makes his move. Everyone has already abandoned any hope of the stock going higher. No one is left to sell and push the investment lower. This is how turning points are formed.
But it’s critical that you wait until you see a turnaround in the charts before you make your move. Remember, nothing says a beaten-down stock can’t go lower. So when everyone’s given it up for dead and it starts flashing vital signs despite it all, that’s your signal to pounce.
Fear is the ultimate buy signal. If you combine the strength to buy when others are fearful with the patience to wait until you spot a turnaround, you’ll fill your portfolio with stocks that deliver market-crushing returns.
