Why “buy low, sell high” may be poor advice for long-term investors

By: Tim Bennett
Is one of investing’s oldest sayings, “buy low, sell high” helpful? Tim Bennett raises some doubts in this week’s video.

Why “buy low, sell high” may be poor advice for investors

One of the oldest adages in investing urges you to buy when prices are low and sell when they are high. On the face of it, this seems unarguable. The problem, however, is it can lead to some pretty unhelpful behaviour when it comes to long-term investing.
The reason is that our brains may be fooled into thinking we are better at judging when prices are in a trough, or at a peak, than is really the case. And worse, the price we then inflict on ourselves for being wrong can be high.

The danger of hindsight

Take a look at this slide, which records the value of a $10,000 investment in Netflix at various points in time.
The correct course of action, with hindsight, is clearly to have bought 10 years ago and held onto the stock until today. However, how many investors would have bailed out either when the price dipped immediately, or after it subsequently bounced to just above its original point. In each case, they may have justified doing so as “getting out on a low”, or “selling to break-even”. At the time, this may have seemed logical but it also helps to explain why relatively few of us ever end up making the money we could, or should.

Why don’t we make more money?

The problem with many investors is they can’t resist making predictions, and then tinkering with their portfolios. Either they think they have identified the top of the market and bail out of shares, or they think they have spotted the low-point and decide to buy. The problem is that most of us end up doing neither and then see our beliefs crushed by Mr Market. This isn’t pleasant in the short-term and may freeze you into inaction and actually make things worse.
A glance at the S&P 500 recently reveals the folly of getting out of the market, thinking that it must have peaked. At every single dip, investors will have reassured themselves that they “caught the peak” and yet the market has so far continued to power on higher.
So, what about buying “low”? The main challenge, once again, is timing.

When do you “buy low”?

No matter which market you look at, the landscape is littered with investors who thought they were buying at the trough, only to discover they were not. The problem is that having got it wrong once, many won’t have had the courage to go back into the market. The risk is clearly illustrated by the NASDAQ and the S&P 500, where there have been times when a nervous investor could have been frightened into cash, never to return. All subsequent capital gains (let alone income) are then sacrificed.
A quick look at the FTSE 100 reminds us that this can work the other way around too for investors trying to call the top (something we looked at earlier). How many investors have been sat in cash for too long recently, convinced that they have called the top of the recent bull run? 8.5% since the end of 2016 may not sound like a lot but it beats the return on cash by some distance.
So, what can we learn from all this?
The bottom line is that “buy and hold” is usually a better strategy than “buy low, sell high”, sensible although the latter may at first appear. That’s because it removes the element of human emotion that can so quickly erode our ability to think and act rationally in either rising, or falling, markets.