Stocks! How to Buy Low and Sell High
Why It’s Hard to Buy Stocks in a Plunging Market
We've all heard the adage "Buy low, sell high." It seems like an obvious path to investing success. Buy low, sell high is a strategy where you buy stocks or securities at a low price and sell them at a higher price.
For many investors, though, actually buying more shares when the stock market plunges is a lot harder than they'd imagine. Even when you believed that a stock was a smart investment at a much higher price, you might not feel comfortable buying it after it's fallen 20%, 30%, or even 50%. I should know - I've been there countless times.
It's the same stock in the same company both before and after the market plunges. So why do so many of us find it so hard to buy after a big drop?
Investing in stocks isn't like shopping for things you need. As shoppers, we're generally familiar with how much the things we buy typically cost. So if you have the opportunity to buy those things on sale for 20%, 30%, or 50% off, it's not difficult to know the value of taking advantage of that bargain. You'll know exactly how much less you're spending on those things compared to their normal prices.
Most investors don't see stocks the same way. Sure, you can look at a company's revenue or net income and come up with a guess as to what that company should be worth. But whatever valuation you come up with using such methods won't always match up with its current stock price. It's hard to have the courage of your convictions that your beliefs are correct — especially when confronted with cold hard facts to its differences.
In the end, most investors give up on coming up with their own estimate of the true value of a company. Instead, they rely on the market or what a business television guru say as their primary gauge of the company's value. Therefore, when the stock price goes down, those investors figure that the actual value of the company has also dropped. That makes them question their entire investing theory, not only dissuading them from buying additional shares but also putting pressure on them to sell off their existing position.
Keep Your Eye on the Business
The best way to have confidence in a bargain opportunity during a plunging market is to stay focused on the long-term prospects for the business. Often, a market decline will happen for reasons that have absolutely nothing to do with business results. Those situations are most likely to result in any share price declines being temporary.
You remembered what happened last year! COVID-19 entered our lives and changed the world. It also changed the behavior of stocks and the stock markets. There was nothing really wrong financially with many of the company's on the stock exchanges in 2020. However, the coronavirus pandemic diminished just about any projected positive stock price movements no matter how strong or powerful one company was. Those prices plummeted - giving reasons to pick up great stocks at bargain prices.
A long-term perspective is also essential. Even when a business is affected by adverse conditions for a brief period of time, investors often overestimate the long-term impact. For example, shares of Booking Holdings (NASDAQ: BKNG) lost 45% of their value between their January 2020 highs and the lowest point in the coronavirus bear market in March. Now, they're back to all-time highs because investors have realized that a year's worth of lost business is insignificant compared to the online travel specialist's future growth.
Don't feel bad if you have trouble buying stocks when they're on sale. But also resolve to think more about why you hesitate to pull the trigger on some wonderful bargain investing opportunities when they arise. Truly understanding the businesses in which you invest will give you the confidence you need to be a more successful investor.
The Bottom Line
While the common investment advice to buy low and sell high may seem like a simple idea, it’s usually not the best idea for the average investor. It is hard because this strategy tries to time the market and determine the best time to buy and sell a stock.
But there are instances and times (like the 2020 coronavirus crisis) investors can ignore public opinion and buy when stock prices are plummeting and sell when they are soaring.
Millionaire and billionaire investors gotten even more richer during the pandemic because many of them purchased quality, beaten-down company stocks at very low prices (around March 2020 - June 2020) and sold them at much higher prices near the end of 2020 and the beginning of 2021.