Buying Low and Selling High

'Buy low, sell high' is one of those cliches that has been around since the beginning of time. This nugget of wisdom may seem simplistic, yet it actually contains a wealth of insight. This level of complexity can be uncovered by considering who it is that like to purchase low and who prefers to sell high. We also need to investigate what scenarios result in low costs, and what situations result in high prices.

Paying Less

Let's start buylow. It seems to reason that if prices are low, there must be more vendors than customers. Therefore, to take advantage of cheap pricing, we must choose to buy when the 'common wisdom' says to sell. Moreover, it is feasible to anticipate when any 'down market' will end, which further complicates matters. Any attempt to "purchase low" entails the possibility that prices may continue to fall.

Public opinion typically thinks the existing state of the market will persist eternally. When prices increase, it's natural to think they'll keep going up. When prices start going down, most people act as if the decline will continue forever. By definition, going against the prevailing market attitude will make your purchases look irrational to many. The majority opinion is often correct, and following it is the simplest option. There is comfort in conformity. Buying gold can be an isolating experience, but hearing your friends discuss their plans to do so might be reassuring. It is reassuring to confide in others who are also struggling with real estate. There's a special connection between people who share similar experiences. Because you are going against the general flow of market mood by purchasing at a lower price, you will not share in this widespread feeling.

Turning a Profit

Selling when prices are high necessitates a counterintuitive move, similar to buying when prices are low. As prices continue to rise, we will need to liquidate a popular investment. You'll have to intentionally disengage from the herd while they all scramble to board the hype train. There's also always the chance that prices will keep rising even after you sell, cutting into your gains. This calls for taking "sane" action to quell the "greed" drive. No one has to be told that trees can't reach the stars. Inflationary price increases are eventually met with market corrections. The cycle of rising and falling prices is endless. Prices rise, become overvalued, fall, become undervalued, and then rise again.

Investors might engage in tactical trading on a regular basis by rebalancing their portfolios. You can lessen your vulnerability to market swings if you stick to a predetermined allocation strategy and periodically rebalance your portfolio to reflect that allocation. For illustration's sake, let's say your portfolio consists of 50% stocks and 50% bonds. Both the stock and bond portions of the portfolio increased by 20%. The stock allocation is now 54%, while the bond allocation is 46%. If you re-balance your portfolio, you'll sell stocks when they're expensive and purchase bonds when they're cheap. To illustrate, suppose that a 20% drop in equities is accompanied by a 1% drop in bond returns. Your portfolio would have gained 0.5% if you had rebalanced it, and it would have lost the same amount if you had not.

Then What Is the Trick?

It's tough to pinpoint a single "secret," but it's probably reasonable to assume that if you hear about a terrific investment on CNBC, it's already overvalued and you should consider selling to reduce your risk. The uncertainty and worry about future property values may present a buying opportunity when you hear about problem investments like people losing their homes to foreclosure.

Both purchasing low and selling high require you to intentionally go in the opposite direction of the market and, perhaps, the majority of your friends. Obviously, this is not something that the typical investor is going to be interested in doing. On the flip side, if we want to be the individuals who buy low and sell high, we need to learn the discipline to swim against the tide and to forego the safety net of going along with the herd.
Posted in Business blogs on January 26 at 09:24 AM

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