Buy Low Sell High
Buy Low Sell HighBuy Low " The secret to the stock market is to buy a stock that's going to go up in price. If it doesn't go up, don't buy it." -- Will Rogers
Sell High " The secret to the stock market is not when to buy so much as when to sell. If a stock is going down - sell it." -- MarkRogers
Huh. I'd heard to sell when everyone is buying (overpriced) and buy when everyone is selling (undervalued). The difficulty is having enough liquid capital to invest when the market is in the midst of crashing, and the discipline to get out while the market is ballooning.
Buy Low And Sell High is the standard vacuous bit of advice anyone gives anyone else in the stock market. How to do that is anyone's guess. If anyone knew how to do that, then they (and everyone they told) would all be millionaires many times over.
Better put, the trick is to know how low and how high. (See Anticipated High and Confirmed High below)
Now is BuyLowAndHoldStock? time (Feb-Mar 2003), 18 to 24 months ago was SellHighAndHoldCash? time. Another way to put it is buy when stocks are bouncing on the bottom and sell when they seem to be making a serious reverse at a top. The top is anything above what you paid for the stock. but preferably at least 130 to 160 percent of the purchase price.
Now is SellHighAndHoldCash? time (May 2005), 40 months ago, it was BuyLowAndHoldStock? time. Another way to put is sell when stocks are bouncing on the ceiling, sell holding on to the cash and interest earned on it until another good time to buy (usually at least 18 to 24 months) in the future, when they may seem to indicate making a serious bottom. If you make a wise decision to do this, then you will be able to buy at least a multiple of two times (perhaps much bigger multiple times) as many shares at that time than you would have had if you simply "buy and hold".
What to do in-between with additional cash available for investment:
The following is not a recommendation; it is only a fabrication of a strategy that a qualified and knowledgeable investor might attempt: BuyAndHold Modified Corollaries:
BuyLowAndHoldStock? (determination of Low: 20 to 50 percent lower than a previous high (Anticipated Low) or the stock is going up and continues to increase in value (Confirmed Low) SellHighAndHoldCash? (determination of High: Anticipated High or Confirmed High - See Below)This could have happened to someone else: (it did happen in one case):
A mistake is made, a stock purchase is made and the price is high. Under BuyAndHold, if the market begins a persistent plunge, it may take several years to recover. In fact the recovery might take as long as three years.
Using the modified corollaries above the following could have happened:
A purchase of 100 shares is made in a stock (we'll call it HTZX) at a price of 80; Time is June 2001. Investment is 8000. A Market reversal has probably begun, but the investor waits; when at 60, Time is Mid August 2001, and the decision is to sell, as the market seems to be in a declining phase and reversal seems unlikely. The proceeds are 6000. The loss is 2000. The market continues lower and lower, HTZX is now 40, and continuing down. The investor continues to hold on to the 6000.
The strategy is to hold cash for investment later. When March 2003 some signs of recovery were evident, the 6000 was converted into 2600 shares of HTZX at 2.30. which share wise are 26 times as many shares as would have been held otherwise. Buy and hold = 100 shares SellHighBuyLow? = 2600 shares. Friday the 13th of June 2003, it is noticed that the shares were selling at 3.00, now the 2600 shares are worth 7800, versus the 300 they would be worth under the BuyAndHold Strategy. Recovery seems to be sustainable and it does not seem to be long before a recovery point of 3.08 will occur. Which would you rather have? The corollary is buy when stocks are going up, and sell when stocks have started down. In between, hold cash. So the winning phrases are BuyLowSellHigh After High going down SellAndHoldCash? then when recovery is relatively sustained, BuyLowAndHoldStock?. At least in this could have happened situation.
As of 20030903 under this scheme, the value would now be $8970, versus the BuyAndHold Strategy where the 100 shares would be worth $345, a difference of $8625.
The key phrase there is "could have happened". BuyAndHold is not 'buy as much as you can right now and hold it forever', it's 'buy a little bit right now, and keep buying a little bit each month, and hold it until you retire.' (This is called DollarCostAveraging?)It's not for hardcore investors, it's for everyday people who want to take advantage of the stock market without getting killed by it. Let's take your example above. Naive buy-and-hold would buy all at once at the beginning ($8000) and end up with $300 after a bad market crash. The super-prognosticator strategy would be able to squeeze by with a small loss ($7800 in 2600 shares). BuyAndHold can't do as well as that, but it can at least make the loss more respectable. Instead of buying 8000 right away and waiting 25 months, buy 320 each month for 25 months. The total expense is the same (not to mention it's easier for most working people to afford $320 a month for 25 months instead of $8000 right now), but the net result is a big improvement:
DatePriceBuyHoldValue Jun-01804.04.0320 Jul-01704.68.6600 Aug-01605.313.9834 Sep-01506.420.31015 Oct-01408.028.31132 Nov-013010.739.01169 Dec-0128.111.450.41415 Jan-0226.212.262.61639 Feb-0224.313.275.71841 Mar-0222.414.390.02017 Apr-0220.515.6105.62166 May-0218.617.2122.82285 Jun-0216.719.2142.02371 Jul-0214.821.6163.62422 Aug-0212.924.8188.42431 Sep-021129.1217.52393 Oct-029.135.2252.72299 Nov-027.244.4297.12139 Dec-025.360.4357.51895 Jan-033.494.1451.61536 Feb-031.5213.3665.0997 Mar-032.3139.1804.11849 Apr-032.5128.0932.12330 May-032.7118.51050.62837 Jun-033106.71157.33472The prices are extrapolated from your example. At the end, our investor has about $3500 in 1160 shares, a modest loss considering the nasty economy, and far better than being stuck with $300 dollars. Better still, this took almost no thought on the part of the investor. As long as the stock eventually recovers, the investor will recover. If the investor stops at this point, the recovery price will be $6.91. Since betting on a single stock is pretty risky (if it never recovers, you're out of luck), the final piece of the buy-and-hold puzzle is to stick with mutual funds. Sure, it's not very exciting, but we're not talking about big money, just enough to retire on. BuyAndHold is definitely not a short-term strategy, it is inherently long-term.
In the example above the "improvement" is a loss in value of $4528.
If you would have made those regular incremental investments into a savings account, you would have been over $4528 Plus interest richer! Why buy something before it goes on sale! If the price is going down, history shows it will continue to go down for a period. Typically the downtime is from 12 to 30 months, Rule of thumb: from 60 to 80 percent of the period before when it was going up.
You're still in the short term mind-set. The above example represents only 24 months, and a huge crash in the stock/market. Give it another 24 months, assuming modest recovery. Let's say the stock recovers to $10. Even without buying any extra, the investor now has $11,573 from an initial investment of $8000. That's about a 9% interest rate, which is far better than you can expect from a savings account in a bad economy.
It is now January 2005 - the 24 months you specified - the stock is now 3.04 your buy-and-hold means I now have stock valued at $3517, and improvement of $45, resulting in a loss of $4473. Buy and hold hasn't worked. Whereas the buy low sell high strategy would have resulted in a present value of the 2600 shares being $7904, a loss of only $96 of the original $8000. (This is $4387 better than the Buy and hold strategy)
Regular buying tends to avoid big gains or losses, but can't improve long-term return - you need some success at BuyLowSellHigh to do that.
Does your table include the cost of purchase as in commissions? Why would one buy any stock which continues to show a persistent and predictable tendency to decline in value? If, instead of doing that, the money is deposited in an interest bearing instrument say of 2% interest per annum, and to use the same dates, in March 2003 he withdraws the cash and interest his transition from that of holding cash to that of BuyLowHoldStock? would result in an amount of shares of approximately 1521 with significantly less expense (the 25 additional commissions). This is an improvement over your example of 1157 by about 365 shares. The BuyLowSellHigh strategy is simple, easy to understand and provides predictable results over the buy and hold regardless, or the constant periodic investment example you present. Simply: do not buy when the market is going down, hold cash or deposit in interest bearing negotiable accounts. Buy when the market has reached a low point and has started up. But use common sense - when a stock is decreasing in value and looks like it is going to continue, sell it. It has a greater value than it will have days, and months ahead. (This is a stop loss strategy.)
Well, for one thing, you don't know it's persistent, and it's not easily predictable. How long have we heard that the economy is just about to rebound? In hindsight, it is easy to see that it kept declining. Anyone can 'predict' in hindsight. The hard part is to predict what's going to happen next month or the month after. Of course, you may choose to try to predict the future (the bursting internet bubble is an obvious example), and you might even get away with it. The point is that you don't have to. BuyAndHold will always win in the long run provided that markets continue to grow as they have for as long as we've had them. Not a huge win, but a very respectable win nonetheless.
Re: commissions. When buying mutual funds, it's easy to set up regular payments, and commissions are pretty close to irrelevant.
Just remember, you don't have to buy first. If you think the current price is high, just sell and wait for prices to come down. This is called short selling and works for financial instruments - where you can borrow the instruments for delivery to the buyer. This also has a very high risk - you have to have a plan for what to do if the prices go up. :-)
-- ShalomReich
Or place a bet on the future movement of some stock-market index (if taxation is lower on the proceeds).
The impression is often given to potential investors that regular investment improves expected returns. Of course, it doesn't. It's simply a way of avoiding "putting all your eggs in one basket".
20030903 -- The BuyAndHold Mutual Funds are now being investigated for violation of fiduciary responsibilities (http://money.cnn.com/2003/09/03/news/spitzer_hedgefund/index.htm). It seems some may not have acted in accordance to the best interests of their investors.
A small number of mutual funds. It's still less risky than BuyLowSellHigh. Pick a respectable one.
Another reason to manage your own financial affairs. It's not RocketScience?. If you buy something at a low price and sell it at a higher price - you make money. If you buy something at a high price and it becomes worth less and less each day, it only makes sense to limit your losses by selling it before it's value is even less. Then wait, even if it is a couple of years, for the conditions to become stable and values start going up. During the down time put your money in a savings account. You will lose zero there versus the continual loss of a buy and hold strategy in a declining market.
Assuming you know what 'low' and 'high' periods are, and how long they are going to last, and have large lumps of cash to invest instantly. That's the whole point; for most people, even plenty of 'experts', these assumptions are not true. BuyLowSellHigh is easy in hindsight.
The market is High 20030904 (again at 20060505)
Lets talk about the market today: We are approaching High. We are not there yet, but a correction seems near. If you bought low (October2002-March2003) you now have a gain of from 20 to 70 percent. That's should be enough. Now the market is High, but still going up. Under BuyLowSellHigh you have two points at which a sale can be made and a gain realized: an Anticipated High and a Confirmed High.
Anticipated High
To sell at this point is Anticipating High. You can sell now, capture the real gain, or gamble that market will continue higher. You can choose to stay with the winners you now have until the market starts flattening out or makes a serious reversal. If you choose the first strategy, you have made 20 to 70 percent in less than one year. That isn't bad. That is what BuyLowSellHigh is all about.
Confirmed High
If you choose the second, and wait for a Confirmed High, you may make even more. But looking at historical precedents, you might end up with less than the present gain if you fail to make your sale quick enough. Reversals and losses are usually precipitous, meaning price changes downward occur with a greater slope (more rapidly) than the changes upward. If you choose this strategy, it will require a daily check on your investments.
It should be noted, that "buy low, sell high" has kind of seen its day. It has become old-fashioned and relies on a foundation of capitalism. What we have today is not capitalism, but rather corporate-ism, so it is no longer easy to do. The stock market is so closely played by those that have huge power over it, that it is really a tricky thing to try to make a profit. Consider the stock market as similar to the gambling conglomerates. When huge corporations control things that should not be able to be controlled, the assumptions of the customers (public) is played to the maximum by the corporation to extract as much profit from the customer (public) as possible. In other words, the stock markets are perverted and manipulated to the extent that the majority of non-corporate investors are guaranteed to lose more then they invest no matter how they play the game, just as with casinos.
It should be noted, that "buy low, sell high" is always an achievable strategy as long as prices obey a cyclic pattern. It is still easy to do if you keep your rules simple. Today (20060505) is not a time to be buying, but rather a time to convert your gains into cash-equivalents (investments with cash values which are not dependent on some trading index). Hold on to these and resist any temptation to believe you will do better than you already have. Count on the fact that if you have jumped out a little early, that you may have lost a little potential, but that the gain you have is real. When the "correction" comes, it usually starts with a vengeance. It is not uncommon for certain stocks to decline in market value more than one percentage point a day. When people sense a bailing out, and join in it, not having anticipated that the correction was coming, they have the biggest enemy staring them in the face and that is "timing", and the second biggest enemy which says something along the line of "ride it out, it will eventually go higher", with the omission of the fact that that time may be 18 to 36 months (at least) in the future, during which time you may simply surrender each day you "ride it out", what could have been "real cash gains". What you should observe is not what the people say along these lines as to what "you" should do, but rather what they are "doing", which is called simply "profit-taking". They will be vocalizing "buy and hold", while they will be practicing "BuyLowSellHigh". Just how wise you are about these matters is dependent on how much you rely on those "not really interested" in you participating with them in "profit-taking", but rather that you be participants in the "holding base" which keeps the bottom from falling completely out.
It is just 12 days since I revised some and added some to this page. Today 20060517 the Dow Jones Industrial went down 214 points. It is still not to late to take gains! But note my warning about thinking you can guess just when the confirmed high would occur. Do some arithmetic on 100 shares of a stock sold on 20060505 versus the same stock sold at closing today. It matters very little that after the 5th that stock went up some more before the precipitous situation of the last few days. If you are buy and hold now, you can just watch someone else sell short and buy to cover and make money while you lose money. When they are making money and you are losing it, where do you think their gain comes from? They will continue to urge you to buy and hold for years and years, while they make money either buying low and selling high, or when the market is going down selling (short) high and buying (covering) low.
Which strategy is best? making money regardless of the direction of the market, or just holding on (providing stability by moderating the steepness of the slope of the decline)and watch your portfolio's value dwindle until it begins to grow again in 2008 or 2009?
(Note: this is not advice and should not be construed as such. It is only observation of who makes and who loses money. The observation is made based on behavior of the market and traders in the past, and should not be construed as saying that behavior will repeat. It says no more than this: Your portfolio's value will be enhanced when you buy a good stock when it is near its historic low, and sell it when it is near its historic high.)
Take your profit and buy a second home. There's almost always a healthy demand for homes.
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