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“Buy low, sell high”: what is it in practice?

Explainers

In investing, we hear the phrase “buy low, sell high” a lot. It basically means that you should try to buy investments when their share prices are low, and sell them when their share prices are high. When we dig into it, you can see that it’s a lot more complex than just four words!

13 April 2022

5 min read

“Buy low, sell high”: investing myth?

That’s what we’re going to do today—scratch the surface of this investing cliche to find the real story underneath. 

How good is your timing?

The thing with “buy low, sell high” is that “low” is a relative term. A share that’s worth $1,000 today might seem high—but if it goes up to $5,000 in the next couple of years, that $1,000 is going to seem very low. And the opposite is also true. A $1 share is going to seem pretty expensive if it drops to five or ten cents. 

The problem is, there’s no real way of knowing ahead of time if a share is going to go up or down. This means that when you “buy low”, you’re essentially making an educated guess. You’re saying that you think an investment is going to be worth more in the future. There’s no way of knowing when a share will reach the next high. It could be years. 

In order to successfully buy low and sell high, you need to successfully time the market—and timing the market is extremely difficult to consistently pull off, unless you have a crystal ball. Even the experts get this wrong! It’s possible to make money but still lose if your investment doesn’t perform inline with other investment options while you wait to sell high—and it can be hard to know where the high is and whether there will be further highs.

If you’re interested in this method, it may be worthwhile considering what “low” and “high” mean to you. By defining a dollar amount for each term, this can help signal when it might be time to take action. There’s also the option to place a limit order, inputting the amount to buy or sell at, which helps maintain the thresholds you define.

But if going after “buy low, sell high” sounds daunting, here are some other approaches to consider. 

Dollar-cost averaging

One option to look at is dollar-cost averaging. This can result in some of the plusses of “buy low, sell high” without the guesswork and analysis.

Here’s a quick refresher on how it works: choose an investment and decide how much money to invest. Then, invest that amount regularly over a period of time. The longer this strategy is employed, the better potential there is for this to even out the highs and lows of the share price.

This means buying at different prices as the investment’s value moves around. For example, if someone is investing once a week, and the share price changes from $1 to $1.50, then back to $1, they’ll have paid an average of $1.25. That’s a bit more expensive than $1, but they also avoided paying only the outlier high of $1.50.

With the dollar-cost averaging strategy, it’s about maintaining consistency in approach, even when share markets are volatile. It’s worthwhile for investors to remember to keep on investing if they back a company and think it could succeed in the future. Otherwise, they might end up only buying when the share price is at a peak and miss out on the dips. 

Diversification and time horizons

Again, you probably don’t have a crystal ball. But what you can have is diversification. Diversification helps balance out an investment portfolio because if some industries or markets are underperforming, other investments from different industries or markets could be outperforming. Meaning, a well-balanced, diversified portfolio can help maintain growth even if certain investments are in a slump.

And as mentioned before, if you fundamentally believe in an investment’s potential but it’s currently down, then you could combine diversification with dollar-cost averaging by “buying low” while still maintaining balance across your overall investment portfolio.

Another strategy that can help is having a long time horizon. In other words, investing for the long term and holding onto investments for years versus short periods. It’s really hard (if not impossible) to predict short-term changes in an investment’s value. But over longer time periods, it can become a lot easier, especially if you’re well-diversified.

Don’t be afraid of tough decisions

The last thing to think about is when to sell—particularly when investing in individual companies. If an investor is thinking that a company they invested in is going to increase in value over time, but that trajectory isn’t actually happening, they may be better off just cutting their losses. 

This is a painful reality, and it’s the exact opposite of buying low and selling high. It’s buying high, and selling low! Or, buying low and selling even lower. Either way you put it, it’s not great. 

But sometimes companies simply can’t respond to changes in the world. Or they’re unable to keep up with competitors. Or they overestimate demand for their product—and end up with more inventory than they can sell.

As an example, this is what happened to Peloton in 2020 and 2021—the in-home fitness bike company saw huge demand during the COVID-19 pandemic, as people couldn’t go to gyms. They bought lots of inventory to match this demand, but when the pandemic started to fade away in 2022, they found that people actually preferred to go to the gym.

There are all sorts of things that can make a company shrink, or even go under completely. That’s why it’s worthwhile that investors keep an eye on their investments and feel confident that the potential for growth is there.

Wrapping up

Buying low and selling high isn’t easy to do! Sure, it’s a common phrase in the investing world, but even the experts can get this wrong. For those that want to try, it could be worthwhile mapping out what “low” and “high” might mean for their investment options. 

But if looking for other ways to be an investor, then it might be beneficial to check out long-term investing ideas like dollar-cost averaging, diversification, and time horizons—and get growing!


Ok, now for the legal bit

Investing involves risk. You aren’t guaranteed to make money, and you might lose the money you start with. We don’t provide personalised advice or recommendations. Any information we provide is general only and current at the time written. You should consider seeking independent legal, financial, taxation or other advice when considering whether an investment is appropriate for your objectives, financial situation or needs.

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