Buying high and selling low, why is it so many investors get this the wrong way around?

Posted on 26 September 2013 with no comments from readers

To succeed in making an investment profit you need to buy low and sell high. Do the reverse and you are going to get wiped out. Repeat the first formula a number of times over a lifetime and you are set up for a financially independent retirement.

We heard of friends who have just bought another apartment in London over the summer. They also bought in Dubai in the summer of 2008. Some folk are doomed to buy high. But at least these guys never sell so they don’t realize their loss.

Repeating errors

That of course could be half the problem, they invest over such a long horizon that they miss their original mistake and repeat it, again and again. You certainly could acquire a property portfolio this way but it would be a much larger one if you bought in the dips like the Dubai crash or waited for the coming London property price correction. Just because a correction has not happened for a long time is a reason to be more and not less cautious.

It is the same story with share prices. Just before the Fed backed down on reducing QE the US stock market hit a high and it is up 20 per cent this year. It’s up a third since last summer and has not had a meaningful correction since 2011. You should have bought five years ago on the low, not now at a high!

As Warren Buffett noted last week: ‘Stocks were very cheap five years ago, ridiculously cheap. That’s been corrected. … We’re having a hard time finding things to buy.’ Take the hint to sell, perhaps, or why not listen to another hugely successful investor?

Carl Icahn said: ‘Right now the market is giving you a false picture. The market tells you that you are doing well, but I don’t think a lot of companies are doing that well. They are taking advantage of very low interest rates.

‘So, obviously, you don’t have to be a financial genius to understand if I can borrow at three per cent or four per cent and buy assets maybe my own stock that is yielding nine per cent, 10 per cent, or 11 per cent, I am going to make a lot of money. In one sense or another that is what is going on. … I do think at [the market’s price-to-earnings ratio] of 17 that you have to be pretty well hedged.’

Why share prices fall

To believe the stock market will only ever go up defies all the historical evidence to the contrary. Stocks will rise and rise until investors start selling. Why would they do that now?

Could it be that the 50 per cent rise in borrowing costs this summer – the largest rise ever in such a short period – is going to slowdown the US economy and perhaps stall the recovery altogether? Maybe that is why the Fed did not stop printing money last week. It knows what bad things are really out there.

The stock market naturally won’t believe this until it sees the hard data. It’s coming and shares priced for an economic recovery will not like it one little bit.