Core Principle Series – Principle #5
“Buy low and sell high”
This principle is one of the most commonly quoted phrases whenever a person is asked how they can do well with investments but it is clear that most people don’t actually understand what it means. Sure – we all get the basic premise that you want to sell something for more than you purchased it for, but the steps to do that are counter intuitive.
The critical piece is the ‘buy low’ part. Just like our example in scenario #1, John purchased some stock based on a tip that a particular stock was doing really well. What John did is actually the opposite of principle #5 – he bought when the stock was high. You see – the key is not buying when the investment is doing well, its buying when the investment has good positioning to do well in the future. Your desire is to get into the investment when it is not doing well yet but likely will do well in the time frame that your investment plan requires.
To follow principle #5, you have to be mindful of your desired outcome time horizon and then watch the trends that will make that happen.
Let me give you an example. Sue has a portfolio of investments. She has 5,000 in cash that she wants to place in a high growth stock (buy low / sell high). Her desired exit or withdrawal of this money is five years. Sue then is looking for industries and companies that are likely to grow in a five year window.
Thinking of today’s environment in 2020, let’s identify the trends that are occurring or will occur in that time frame. Here are the things that Sue thinks about. Brick and mortar stores will continue to struggle (perhaps don’t invest in retail or real estate associated with malls), more people continue to shop online (maybe invest in shipping companies or things that feed that environment like cardboard box companies and people that build tape or packaging), the world is in a lot of chaos with lots of unrest (perhaps review companies and technologies associated with the military and space), lots of people are retiring and they like to travel when they can (maybe look into hotels, travel companies, luggage companies and airlines).
You see the pattern. You want to buy into things that are blossoming that will reach their high during the time when you need to take the cash back out. Buy low and sell high – its a foundational principle.
As a reminder, the 10 principles of smart investing are:
- Don’t put all of your eggs in one basket
- If it sounds too good to be true, it probably is
- Urgent and only available today = wrong
- Follow the money
- Buy low and sell high
- The balance of risk and reward
- Fail to plan, plan to fail
- The endowment mindset
- Whose money is it?
- Fact based on an observation of one is not meaningful
If you’d like to set up an appointment to talk, please send me an email – Todd@ColwynInvestments.com