Thinking about “Buy Low…”
Everyone knows “Buy Low, Sell High” for stock investing. We all know it and understand it. But why is it so hard to do?
It does seem that although the objectively simple instructions of “Buy Low, Sell High” are obviously clear and true, I venture to say that that is not taken to heart by much of the investing public.
What people seem to want is validation and approval. That means they seek the comfort of the crowd. So when stocks reach new highs, they join the crowd and stocks continue their upward trend, at least for a while. When stocks decline, the crowd is selling and investors join in dumping stocks, thereby losing money.
That description could be called “Buy High, Sell Low,” the direct opposite of how to profit from investing.
How To Navigate
It seems to me that the root of the issue is the propensity of the investing public to be as susceptible to others’ opinions as the general public. We see crowd behavior all the time: fashion, politics, fads, even religions. While some behaviors have positive effects (at least the economy is in motion when people spend money), for the most part it looks like although there may be some emotional satisfaction being part of a mass of people, the individual more often than not ends up at the losing end of the stick, at least financially.
Changing results means changing one’s behavior, And changing one’s behavior means changing one’s thinking.
Alone
I suspect people will go along with negative results just so they won’t be alone. The craving for group approval outweighs consequences. But without changing one’s thinking, nothing changes.
So how to change one’s thinking? We all know the aphorism “I’ll see it when I believe it.” This points to the role that belief overrides perception of reality. The first step, I would surmise, is to realize that fact. That there may be room for a change in perception.
History
Normally we seek corroboration rather than facts. How to overcome this deficiency? By allowing ourselves to be wrong.
If I understand that it is possible that I could be wrong, then that opens the door to wider possibilities in the world. If I can accept that I am wrong about some things, why should I not consider that I could be wrong about many things?
After all, as investors, we are often wrong. We guess the directions of stocks, interest rages, trend-lines, moving averages, and so on, and we are often wrong. We adjust our perceptions based on what happens in the market, and move on. Why is it that often being wrong in investing does not translate to accepting the possibilities of being wrong in other aspects of life? Why do we so segment our investing life from the rest such that that we cannot learn life lessions from investing?
Is Up Down and Down Up?
By contrast to the general investing population, let’s look at a different view on “Buy Low, Sell High.”Since there are two parts to this saying, we will look at each part individually.
A person who is interested in investing, in buying, would welcome low prices. Namely, a decline in the market would present positive opportunities for this person. In fact, the steeper the decline, the better for this investor. Buying low happens when prices are low.
Coversely, an inestor who is seeking to sell, would dislike a decline, because they would either not profit or lose money.
In “Sell high”, a person looking to buy would dislike a market advance. And a person looking to sell of course would welcome higher prices.
We can sum these entire circumstances in one handy table:
| Average Person | Perceptive Person | |
| When Prices Decline | Panic, Sell | Buy Low |
| When Prices Advance | Euphoria, Buy | Sell High |
Where do you find yourself? Let me know here.
The illustration of a wolf and a human is from the The Queen Mary Psalter, estimated frm 1310-1340. Courtesy The British Library.
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