Buy Low, Sell High?
Your First Step Is to Buy Low...
By Austin Pryor
© Sound Mind Investing | April 2008
After the old accountant retired and turned in his keys, his co-workers were eager to search his desk for the mysterious piece of paper he kept there. Each work day, like clockwork, he would arrive at his desk, unlock the bottom right drawer, remove a small 3x5 card he kept there, study it for a few moments, and then return it to its safe resting place under lock and key. A small crowd gathered to see what the accountant had written that he studied so faithfully. The card read, "Debits go on the left, credits go on the right."
Sometimes we need to be reminded of the basics. Perhaps it would help you to write down your investment goals and refer to them frequently. One of them would likely be that, generally speaking, your long-term mindset is to "buy low and sell high." You may have noticed by now that this is a devilishly tricky thing to do consistently well. That's why having a plan in place to guide your decision-making is so important (see Make Sure Your Investment Decision-Making Is Inside-Out). Here is a bit of self-evident logic that your plan should take into account: You can't buy low and sell high if you . . . sell low instead of buy low.
Of course, you say, that would be self-defeating. Yet, many investors have indeed been "selling low" of late. The grim news reports have raised their fear levels. Here's a small collection of recent headlines, all appearing in the span of three days:
- "Economists say recession is here"
- "Consumer confidence slides to 16-year low"
- "Homebuilders confidence mired near record low"
- "Oil plunges on fears economy is worse than thought"
- "Inflation fears drive gold above $1,000 level"
- "Dollar plumbs historic lows"
Consider this question: What would you expect the news to be like when stocks are low? Bad, of course. If the news is good, stocks are up. So, we might paraphrase the old axiom as "buy when the news is really bad (because that's when stocks are low), sell when the news is really good (because that's when stocks are high)."
Fear-generating headlines like those above can cause investors to momentarily forget that when prices are low, they should, if anything, be buying. The idea is to accumulate more and more equity shares over a lifetime of investing, riding the long-term prosperity of the U.S. economy. A plan of dollar-cost averaging (DCA), where you invest the same dollar amount at regular intervals (e.g., every payday when an employee contributes to a 401(k) plan account), is great for helping you do this. At times like these, when your investment dollar is buying you more shares for your money, you might even consider stepping up your contributions if possible.
Having said this, let me make two clarifications. First, continuing to buy low is prudent only in broadly diversified portfolios. When your additional purchases go into an indexing approach like SMI's Just-the-Basics strategy, or an actively-managed portfolio like SMI's Fund Upgrading strategy, the high degree of diversification helps protect you from isolated blow-ups. Continuing to buy into the falling share price of an individual stock, like that of Bear Stearns recently or Enron in days past, can be foolhardy. So, yes, buy low, but only in a fully diversified portfolio where your ultimate success depends on the overall economy and not a single company or industry.
Second, buying low doesn't mean prices can't go lower. How low is low, anyway? You won't know until months after the final bottom. All you can do is determine to be a buyer at prices that appear low relative to their recent highs, or perhaps in relation to recent or projected earnings. As of this writing in mid-March, the market has closed as low as 18.9% below its October high. It's been a wild and unnerving ride down, and it may not be over. But buying at almost a 20% discount level is a sensible act if you're a long-term investor (say, a ten-year time frame before you'll need this money). You might soon have the opportunity to buy more at 25% or 30% discounts . . . or you may not. The best bargain-hunting days may already be behind us. See discussion of dollar-cost-averaging results over 5- and 10-year periods in How to Virtually Eliminate the Risk of Capital Loss.
This kind of market environment requires patience and fortitude to stay the course, but long-term investors should embrace
the opportunity it offers, not run from it. 
 |
Austin Pryor has three decades of experience advising investors, and is the founder of the Sound Mind Investing newsletter and website. Austin lives in Louisville, Kentucky, with Susie, his wife of 46 years. Two of his sons, Andrew and Matthew, work with him at Sound Mind Investing. A third son, Tre, is a Realtor® in the area. |
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