Buy Low, Sell High

by Mr. Cheap

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One of the most basic of stock buying strategies is to buy low and sell high.  It makes absolute mathematical sense, but the difficulty is the execution.  Psychology works against us: when markets are high there’s a euphoria that makes it very easy to join in with the herd and buy high.  Conversely, when markets are low, it can seem like the world is ending and it makes it easy to sell low.  Both temptations will undermine your long term investment returns.

Years ago when the dot-com bubble burst I was tangled up with all the standard greed-driven tech stocks (JDS Uniphase et al.).  About 2 months after the burst, I was talking to my broker in New York (I’d never pay for a broker again!).  He told me that everyone says buy low, sell high, but no one does it.  This is the time to buy low he assured me and tried to get me to put more money into the market.

I agreed with his philosophy, and told him so, but at the time I wasn’t working and was gearing up to go back to school so I just didn’t have any extra cash.  It was lucky for me that I didn’t, as things kept going down further and further.  Part of the scary part of bear markets is that no one knows where the bottom is.

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Some people decide to sell, thinking they’re being wise to move into a cash position.  They stay in cash and miss the rally, and end up having to pay top dollar to buy back stocks later on.

Its scary times right now, with the TSX dropping 840 points yesterday.  If you get out now though, you’re buying high and selling low, which is probably not a great idea.  Some people will say they need their money and they can’t risk any more loses.  I’m sympathetic to this view, but if this is the case, they never should have had so much invested in equities to begin with.

If its not that you need the money, but just that you can’t stand the thought of losing any more, it might be worth considering leaving your stock alone, stop reading about the market, and let it play itself out.  They say a rise in stock price isn’t a valid reason to buy, and a drop in stock price isn’t a reason to sell, so make sure if you’re thinking about selling, you have reasons beyond the recent volatility.

Personal finance bloggers have been saying that evaluating your reaction to the current market tells you how risk averse you are.  If you’re panicking right now, in the future it’s probably best to keep a large fixed-income portion in your portfolio and stay very diversified.  If you’re able to ride this out without getting too excited, you’re probably a more risk-tolerant investor.

Have you sold stock recently?  Bought?  Stood pat?

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{ 24 comments… read them below or add one }

1 Four Pillars

I’m standing pat – of course I’m still making my regular monthly contributions.

2 Nurseb911

Buying ALL THE WAY Cheap. The only problem I keep running up against is that I seem to be perpetually low on cash…haha

3 Mr. Cheap

Mike: Good man!

Brad: That’s my problem too. *sigh*

4 Adam

I’ve had some cash squirrelled away for the past 6 months waiting for a nice cheap day to load up on some bargains.

The time has come, just don’t know if I should go into individual dividend paying stocks that I want to go into, or just dump it into the TSX-60 and let it build up…

5 guinness416

I’m a little worried that I’m not worried enough, to be honest, that I’m too risk tolerant to make the right moves. It’s a great mystery to me that the one area of my life I’m not high-strung about is my money. So like Mike, today being payday, I’ll be making my usual contributions tomorrow (I guess I’m getting a whole lot more of them though).

6 Elasticlad

Staying pat…but evaluating my options.

7 Mr. Cheap

Guiness: I’m the same, I’m pretty high-strung in most areas of my life, but with investments I’m able to maintain a state of zen-like calm about the whole thing…

8 Mrs Pillars

Guinness, that is interesting. Maybe it’s because the investment is to pay off for retirement so far in the future. Daily life is so much more immediate with it’s stresses.

9 Mr. Cheap

Adam: Tough call, if I had some cash I’d be debating the same thing (I’d be torn between dividend payers, financial ETFs or a diversified couch-potato-eque buy)

Elastclad: And which options are you evaluating (buying or selling)?

10 Elasticlad

Whether I should divert my weekly desposits into a safer haven.

Intellectually I grok Buy Low, Sell High.

Emotionally, I can’t stand to see my weekly contributions evaporate as if they were never there.

11 mjw2000

I just wish I had some cash to buy….especially global equities…I just hope it stays down till Febuary when I do my annual buying…

12 nobleea

Overall, I’m rather apathetic about the whole situation.

Really, it’s a race. A race between you and everyone else who is planning on retiring at the same time you are. Sure you may be down 10% from yesterday, but the people you are racing against are also down that much. So it comes down to who can save more and be more frugal. Regardless of how much things drop by, if you are above average in your savings and frugalness, then your retirement and quality of life will be above average. It’s all relative. It’s great to have a concrete goal like $1million by this age/date, but really it should be a relative thing (like be in the top percentile or something like that).

13 Kyle

Agreed, if you are panicking from your losses today, you are investing beyond your risk tolerance and that’s a recipe for disaster.

14 nafs

I’m staying pat with my RRSP but I have an index fund where I squirrel away savings for a downpayment. I’m not looking to touch the money for another four years, but I am thinking of splitting my monthly contributions – half to the fund and half to a high-interest account.

15 Quick Lunar Cop

I mostly invest in my RRSPs through bi-weekly contributions, but I a substantial amount of money (inheritance) to invest before the RRSP deadline.

I’ve been adding to my index funds quite a bit lately, and making sure that whatever I add brings back my investments to their “right” proportions.

Since all my investments are in for the long term (25 years or so), I see the current turmoil as a great buying opportunity!

16 Jerry Hung

If market goes lower, more and more go into TD e-funds Canadian Index and International Index

If market goes high, well, sit and do nothing

If options get called, I bought something I would’ve bought anyway

But no, it is not easy watching all this happening and feeling powerless to do anything

17 Mr. Cheap

nobleea: I have a bit of an unusual perspective in that I’m not aiming for a certain “percentile” or a fixed number. I just want to have enough income to pay for my living expenses as soon as possible (retirement age is the only metric I really value).

nafs: 4 years is a tough time frame. You want to get the higher returns from equities, but it’s such a short period, volatility might bite you.

qlc: I think you’ve got the right attitude for a long-term perspective.

Jerry: The powerless aspect of it never bothered me, I’ve never felt particularly in-control of the market (or any particular investment). To paraphrase Warren Buffett: I don’t know whether it’ll go up or down the day after I buy it (and I don’t care).

18 bigasssuperstar

When I saw things tanking on Friday — TSX down, RIM down 40% — I took $800 out of my money market fund and put it in NA growth, which was at year-long lows. Got a good price.
Sure, I was bummed on Monday when everything went splat, but today’s bounce-back makes me think the Friday move was slightly less than stupid.

19 moneygardener

I like your comments about this being a risk tolerance test. These are the times that I knew would come and I am reacting like I thought I would be. No panic just a view to the long term and a desire for more cash.

20 Assetologist

“Personal finance bloggers have been saying that evaluating your reaction to the current market tells you how risk averse you are. If youre panicking right now, in the future its probably best to keep a large fixed-income portion in your portfolio and stay very diversified. If youre able to ride this out without getting too excited, youre probably a more risk-tolerant investor.”

What if you are giddy with the huge drops this market experiences every odd day!?

Look forward and pick your future – do you think capitalism is dead or just experiencing a ‘hard reset’?
If you foresee a future without capitalism than get your money under the mattress.

My view is not so radical therefore, I am slowly picking the stocks I want to hold until the next period of irrational exuberance.

One of my moats involves dividends – I focus on stocks that should continue to pay solid dividends even if the increases are temporarily on hold.

See opportunity where others see disaster.

21 Amy

Now is an excellent time to buy! It’s so low, and if you look at trends over the past 10-15 years, these dips are very normal. What goes down, must go up and vise versa. Whatever you do, PLEASE don’t sell now as you’d be losing money.

22 Amy

PS – if you have extra cash on hand to sink in… nows the time.

23 Assetologist

Start taking bites out of the stocks you want now IF you have:

* extra cash on hand or can borrow for less than the dividend payed
* tolerance if the stock drops another 20-50%
* 5-10 year horizon
*consumer debt is minimal

Good Luck

24 Lisa

Who knows the bottom or top? Better to cultivate more risk tolerance and wait untill the circumstance turn out to be positive as far as our investment is concerned. I would prefer not to loose my hard earned money by selling at low, any idea?

Lisa

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