How to “Buy Low, Sell High” With Rules

The Myth

“Buy low, sell high.”

Okay so it’s not real­ly a “myth”. But it’s the kind of pithy invest­ing advice that sounds like a strat­e­gy — but isn’t. As soon as you start invest­ing you hear it all the time because, on the sur­face, it’s makes sense. That is the basic idea of invest­ing. The prob­lem is that it hides all the hard parts. And it begs the ques­tion — how do we define “low” and “high”?

Why People Say It

It sounds smart. And our brains love slo­gans that fit on a bumper stick­er. It’s why politi­cians use three or four word slo­gans. “STOP THE BOATS”. They com­tain just enough infor­ma­tion to make them hard to argue with but lit­tle enough to hide the messy details. And, yes, we should invest the same way we shop for any­thing else in life: we should try to buy things when they are avail­able at a dis­count.

The idea isn’t fool­ish. And that’s exact­ly why it caus­es trou­ble.

The Trap Behind the Logic

The real ques­tion is: How do we know when “low” is actu­al­ly low?

Low com­pared to what?

Yes­ter­day’s price? Last year’s? Its com­peti­tors? Vibes?

I see peo­ple say the price of bit­coin is low. Gold is low. Google is low. I don’t think any of them are low because I think they are all way above their intrin­sic val­ue.

We can only call a price “low” when we know what the under­ly­ing asset is worth. With­out val­ue, “low” is just a guess. It might be a dis­count… it might be a warn­ing sign… or it might just be low com­pared to the mas­sive­ly inflat­ed price it was com­mand­ing a month ago.

Same with “sell high”. High com­pared to what?

Ten per­cent above what you paid? Twen­ty? Dou­ble? Triple?

How do you know it won’t keep going up? Investors cut their best per­form­ers short all the time because a num­ber on a screen makes them ner­vous. “High” only makes sense rel­a­tive to val­ue. And with­out val­ue, “high” becomes a mov­ing tar­get defined by your feel­ings.

Pick­ing the right stocks is hard enough as it is. Even the great Buf­fett says he only has a 60% suc­cess rate. Do you real­ly want to sell your win­ners and replace them with some­thing that might not do as well?

That’s the flaw of buy low, sell high. The slo­gan skips the only part that mat­ters:

How do you mea­sure val­ue in the first place?

The Hidden Cost

When investors don’t have a way to define val­ue, the slo­gan becomes a trap dis­guised as wis­dom.
Some­times prices look low because the price fell… for a rea­son. Some­times we think the price is low because some­one con­vinced us the price will be high­er in a year, based on.… vibes.

Some­times we sell things because they look high… only to watch them con­tin­ue to go up for anoth­er two years.

Some­times we rebal­ance at the wrong time because we’re try­ing to “take prof­its” instead of keep­ing our strongest per­form­ers on the court. Buf­fet­t’s line said it clear­ly: why would you bench Michael Jor­dan?

Over decades, try­ing to buy low and sell high can be expen­sive:

• Strong stocks are sold too ear­ly

• Weak stocks held too long

• We buy stocks we should­n’t have bought

• Port­fo­lios under­per­form not because we were reck­less, but because the log­ic we’re fol­low­ing is incom­plete

Every trade costs us in lots of ways. Some are mon­e­tary costs — bro­ker­age fees and cap­i­tal gains tax. Some are ener­gy costs — our time, our men­tal load. There­fore we should want to avoid trad­ing as much as pos­si­ble.

This is why the slo­gan feels right but behaves bad­ly in prac­tice. The miss­ing lay­er is val­ue. With­out it, the phrase becomes a coin toss mas­querad­ing as a strat­e­gy.

The Fix

There is a way to buy low and sell high con­sis­tent­ly, but it has noth­ing to do with intu­ition, chart shapes, or “feel for the mar­ket”.

It comes from rules.

Rules that define what val­ue is.

Rules that tell us when some­thing is gen­uine­ly on a dis­count.

Rules that tell us when it’s time to sell, so we don’t cut our best per­form­ers and don’t hang on to dead weight.
We don’t eye­ball it. We don’t guess. We don’t time emo­tions. We don’t try to time the mar­ket.

We let rules make the hard deci­sions. Rules that have been mar­ket test­ed over decades. Our rules may not be per­fect, but they are there for a rea­son. They exist to stop us from mak­ing bad deci­sions.

“Buy low, sell high” isn’t wrong. It’s just unfin­ished. Once you see the miss­ing pieces, you stop treat­ing it like a strat­e­gy and start treat­ing it like an out­come.

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QAV Myth Killers is a week­ly col­umn in the QAV newslet­ter, tak­ing apart a piece of
invest­ing con­ven­tion­al wis­dom. Read the series, or
get it by email every Fri­day.

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trad­ing as QAV is a Cor­po­rate Autho­rised Rep­re­sen­ta­tive (CAR 001292718) of MF & Co.
Asset Man­age­ment Pty Ltd (AFSL 520442). This is gen­er­al infor­ma­tion and does not take your
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