Buy low, sell high. A powerful little market truth that is simple in nature, and takes courage to follow.
The less you pay, the lower your cost basis. The lower your cost basis, the less skin you have in the game. The less skin you have in the game, the higher your profit potential.
Whenever you invest, your goal should be to get the lowest price possible to give yourself the highest chance of long term success.
The advice may be simple, but following it takes some serious guts. Buying low and selling high means you sell when the market is looking good and buy when the market looks terrible.
Imagine the stock market has just dropped 50% over the past week. The financial media is going crazy with talk of Armageddon and fund managers are frantically trying to pull out of the markets.
Now imagine your best friend tells you he is really excited and is going to invest his entire life savings into the markets next week because the market crashed.
On the surface it sounds crazy. Why would anyone want to pour their life savings into a stock market that is burning to the ground?
The short answer: buy low.
I know from personal experience it is nerve-wracking to invest your hard earned money when it looks like everything is going to hell.
Buying low, I purchased a major stock index that dropped 15% in one day. To my dismay, it dropped another 13% the next day!
Did I sell in panic? You bet I wanted to, but I knew the market had just given me another buying opportunity so I took advantage of it.
A short two months later, I sold the index for a healthy profit. Keeping my nerve provided me with a solid return. The sad part of the story is the index actually rose another 30% over the next two months.
I could have made an additional 30%! But hey, I like to play it safe so it’s okay with me. There is always another stock or index crashing that I can buy low in the future.
At this point you might be wondering how you know a stock is actually going to rebound. There are stocks that drop, and never bounce back.
So what is the difference between buying low for future profit, and buying low and never seeing a profit?
The company determines the answer. If a great company drops in price, it’s a good deal. If a bad company drops in price, it’s economics.
On a larger scale, the stock market itself operates in very predictable cycles. It goes up, then it goes down. It moves back and forth between boom and bust.
It’s difficult for many investors to use this to their advantage because these boom and bust cycles typically last decades. Keeping a long-term view of will help you see which part of the cycle the market is in.
Here’s an example of what this looks like:
2008 Bust – excellent opportunity to buy
2014 Boom – excellent opportunity to sell
Personally, I’m waiting for the next market bust so I can load up on great investments again like I did in the wake of the 2008 collapse.
Buy low, sell high.
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