“Buy Low Sell High” is one of the most popular sayings in the finance industry and you probably heard it numerous times by now.
Just Buy Low Sell High..they say! Sounds simple, doesn’t it? You want great profits? You should buy a stock when it is low and sell it when is high.
Great plan, but how are you suppose to do that?
How can one tell when a stock is low or when a stock is high, you may ask ? That is indeed THE QUESTION and in fact it is the most complicated one an investor must answer before he decides to buy or sell a stock.
How to determine if a Stock is Low or High
Lets try to figure that out with an real example. Take a good look at monthly stock chart below. What do you think? How was the stock at points 1 trough 6. Was it High? Or maybe Low?
Remember ..you would only had the left side of the chart available to draw a conclusion. Be honest and write your answers down.
Now that you have done that, i am going to tell you that there is no good answer simply because the question was incomplete. It is like one of those math equations that you can not solve because you are missing some variables.
Notice that I have asked you to determine if the stock was high or low and you automatically assumed I am talking about the price. But what if i was not? Maybe I was referring to other methods people use to determine if a stock is high or low, methods like P/E ratio , EPS ( earnings per share ), dividend yield etc.
You Need all the Pieces of the Puzzle
Even if i would have specify that i am talking strictly about the price, the equation is still incomplete. Price High or Low compared to what price? Last month High and Low? Last Year High and Low? 5 years ago? Or maybe i was talking about the first month you see on the chart. Then you could easily say that all the other prices are relative high compared to it.
You are starting to understand now why people make so many bad decisions when it comes to trading. One month high could still be near 1 year low, price at 1 year Low could still be near 5 year Highs, oversold on the daily chart can still be overbought on the monthly. See the mess?
The big problem is when you zoom in/out the time interval you can get mix signals on the same stock. Daily Chart may tell you its time to buy, but the monthly chart may suggest a sell. It is very confusing therefore you need to take a different approach.
Buy or Sell based on Future not Past.
The bottom line is that by looking at a chart you can only compare today price with the price highs and the lows for a determined interval of time in the past. That can be helpful information, but it is nowhere good enough and your attention should be focused on something else.
In order to be a truly successful investor you need to be able to determine if today stock price will be considered low or high in the future and that my friends is the key to amazing results!
Below is same stock chart , updated with current prices. Isn’t it strange how all those past points look so low priced now? What if, back then you would have worried less if the price is low or high , and maybe focus on the potential price in the future? Do you think you would have had better results?
How to Really Buy Low Sell High
Past prices aren’t going to help you much and you therefore you should focus your attention to the future and draw a conclusion based on the following steps:
- Choose a holding time interval ( the longer the better ).
- Determine the potential price at the end of the holding time.
- Ask himself if the investment makes sense ( compare today price with potential price).
For example, i usually look to buy stocks and hold them for at least 5 years and therefore the minimum price increase i am looking for is at least 100%. If i can not honestly say to myself after looking at the chart price and financial statements …yeah it is reasonable to assume that this stock will move that much..i will avoid buying it and look for another one that fits into my rule.
This is in fact one of my most important rules of filtering the winning stocks.I will pass any investments that doesn’t show a potential of at least 100% in 5 years.
You should not buy now because the price is low relative to the past, you should buy now because you determined today price is low, relative to a future price.
After all, there is at least one investor who didn’t care much if today price is high or low relative to the past and made all his buying decisions based what he thought the company value will be in 10 years or more. He did pretty good , don’t you think so?
You may have heard of him. His name is Warren Buffet.:)
If you want to find out more about the “”buffetology method” , when and why is Warren Buffet buying stocks, this is an excellent book.
Got any questions or comments? Send them with the box below.