In the Stock market, It is an adage from the period of last 10 years that “Buy Low, Sell High”. It is just common sense and some people consider it as a complete waste of time to even mention this phrase. However, there is more to the phrase than meets the eye, because as we see from the time how investors end up buying high and selling low instead.
Now the question is, why is it so difficult to stick to this apparent simple investment advice? Here Multi Management Future Solutions team of research explore this below
First, let’s start with understanding what does “low” and “high” actually mean. In the absence of any objective measure or a numerical value, the two words can be very unpredictable and result in considerable confusion.
The term “Low” actually means to the low valuations, not just a low share price, valuation refers to the price-earnings ratio or price-to-book ratio of a company, and measures how lavish a share is in regarding the profit it generates or the assets it owns. The company with a share price of $0.01
The company with a share price of $0.01 may still be “expensive” if it is loss-making, as the continued decline in the business may finally make the company worthless. In other condition, a company with a share price of $50 may actually be “cheap” because it can generate, say, $30 worth of profits in one year, that means you can cover your investment back in just two years, therefore it simply clears that low and high relate to valuation metrics rather than an absolute share price, and this makes it a little easier to understand.
But is there any threshold to benchmark against “low” and “high” to define? The way to evaluate this is to look at the five-year average valuation for a company and to see if the current valuation exceeds this trend. If yes, then the company may be more costly than it used to be, on average.
At the end the final the most difficult thing is the execution of the buying and selling once we establish the shares we bought cheaply are getting costly and here the physiology plays a major role to hold back from selling due the sentimental reason, which means we don’t want to lose the stock, or we may worry about suffering from regret if the share price continues to climb after we sell. Hence it is not really so simple to “buy low, sell high”!