Tuesday, 17 April 2018

Buy Low Sell High Can or Not?

The notion of 'Buy low sell high' is usually the desired way to earn in investing.

So imagine you have done your homework analysing a strong company with great potential. And your valuation tells you that it is now at a cheap price.

You went ahead to buy the share. But to your horror, the share price seems to drop immediately right after you bought it. And it continue to slide further for an extended period right after.

This is a familiar scene. It happens often, even to me, and it is indeed puzzling.

Buy low sell high is inherently difficult. How low is low? How high is high? Will today's low become tomorrow's high or vice versa?

Everyone tries to buy low sell high. But when a trade goes through, there is always two side of the coin - buyer and seller. Surely the seller think its high and the buyer thinks its low. So is it low or high? It is very subjective.

What I observe is everyone, to be precise about it, hopes the price is low at the exact moment they are buying it, and wishes for the price to shoot up right after. Seems like investors hope the market to really nice to grant us our wish by lowering the price at that brief moment, just for us to board this 'rocket', and blast off into the sky right after. In short, they want to buy lowest!

Its incredulous. But this is very common investor mindset.

So can we really buy low sell high? Is there any way to do it? There is no easy answer to this question. But we can approach this notion bearing in mind two important points.

Relative low, not absolute lowest
Most investors are obsessed about buying at the exact lowest point and selling at the highest.


But can we change our psychology, to buy low, over a period of time instead?



Lengthen your horizon, expand your holding period. Buy around the region highlighted. They are all at a relative low, not absolute lowest. But still relatively good price isn't it? Perhaps, space out your purchase over a 2-mth period for example. Now then its not impossible to buy at a low.

Even if you buy at a low, your position would still be in the red often
This is even an more important point in my opinion. Acknowledge that even if you buy at a low, very often your stock position will still be in the red.

This is a fact of stock investing. In the short term, we cant control how a stock price moves, which nobody has any control over.

This is even more likely for an investor who likes to buy cheap after a sharp rise in a stock's share price because he is not good at bottom fishing and the strong downward momentum will carry the stock price further lower.

But what we can control is our psychology and how we view these paper loss. Try to come fully to terms the above point, accept it, then the red numbers in our portfolio wont be so hard to swallow.

Using an analogy, no one will curse and swear at Spore weather if it rains in the afternoon after a bright windy morning right? We all accept the unpredictability of spore weather, come to terms with it, and plan our days around it.

Likewise, accept such a characteristic of Mr Market, and fine tune our investment mindset accordingly.

Buy at relative low, over a period of time. Accept temporary paper loss. What investors should aim for is the likely possibility of significant profit after a few years. Don't fret over the daily fluctuations in between if your company shows good results and strong fundamentals.

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