Why “Buy Low, Sell High” Is Harder Than It Sounds
In most social circles, I’m just Debbie – an aunt, sister, or friend.
Professionally, however, I’m Deborah Ellis, a Financial Planner and Investment Advisor.
Whenever I’m at a party, usually shortly after the cocktails are served, someone will discover what I do. Inevitably, they’ll ask for an investing tip or what I think the next hot stock will be.
Especially with market volatility, even I would require a crystal ball to know which company will skyrocket in value tomorrow. So I usually give them the simplest investing advice I can:
“Buy low, sell high.”
That sounds easy enough.
Unfortunately, it isn’t.
Key Takeaways
“Low” and “high” are relative terms. A stock price only means something when compared with other information.
Common measures such as price-to-earnings, price-to-sales, and price-to-book ratios can provide useful context, but none tells the whole story.
A stock’s price can also be considered relative to similar companies, the broader market, moving averages, fund ownership, and analyst rankings.
There is no formula that guarantees you will buy at the bottom and sell at the top.
Knowing your goals, your temperament, and why you own an investment matters more than chasing the latest hot stock tip.
The Investing Question I Always Get at Parties
Once someone discovers that I work in finance, the question is usually some variation of:
What should I invest in?
Or:
What’s the next hot stock?
I wish there were an easy answer. But investing does not work that way.
“Buy low, sell high” sounds wonderfully straightforward until you have to decide what low and high actually mean.
What Does “Buying Low” Really Mean?
Buying low is a completely relative term.
Low compared to what?
And what does high mean, for that matter?
When looking at the price of a stock, it is only low or high in relation to something else.
Let’s say a company became public in 1999. At its initial public offering, the stock was $12 a share. Twenty-five years later, the price has risen to more than $800 per share.
That certainly looks high compared with its initial offering.
But some investors might still consider $800 per share low enough to buy depending on what they are comparing it with and what they believe the company is worth.
The number itself does not give you the answer.
How Investors Put a Stock Price in Context
There are common analyses used to help determine whether a stock may be priced relatively high or low, including:
Price to Earnings
Price to Sales
Price to Book
Each comparison provides a place to start.
But even these ratios can be measured and interpreted in different ways. A stock’s price relationship is more complicated than one number or ratio.
Other variables investors may consider include:
the stock’s price relative to similar companies
the stock’s price relative to the market as a whole
the stock’s price relative to its moving averages through technical analysis
the mutual funds and exchange-traded funds that hold the stock
analyst rankings
Each provides another piece of information. None provides a guarantee.
Why “Buy Low, Sell High” Is Not a Formula
All of this means there is no guarantee that you will be able to buy a stock at a low price and later sell it at a high price.
There are simply too many variables involved.
And we haven’t even touched on another important aspect: your own temperament and history with money.
Two people can look at exactly the same investment information and react very differently. What you believe about money, how you respond to risk, what you are trying to accomplish, and why you purchased an investment in the first place all affect the decisions you make.
That is something a hot stock tip at a party cannot tell you.
Know Why You Are Investing
This is why I believe a thoughtful financial plan that is unique to you is so important to your investment strategy.
You need to know:
Who are you?
What are your goals?
Why are you investing in this particular company?
Understanding those questions is far more useful than trying to guess which stock will skyrocket tomorrow.
And it will serve you much better than any hot investing tip offered between mouthfuls of canapés at a party.
Frequently Asked Questions
1. What does “buy low, sell high” actually mean?
The basic idea is to purchase an investment at a lower price and eventually sell it for a higher one. The difficulty is determining what qualifies as “low” or “high,” since both are relative to other information and circumstances.
2. How can you tell whether a stock price is low?
Investors may consider measures such as price-to-earnings, price-to-sales, and price-to-book ratios, along with the stock’s relationship to comparable companies, the broader market, moving averages, fund ownership, and analyst rankings.
3. Can one valuation ratio tell me whether I should buy a stock?
No. Each ratio provides information, but the numbers can be measured and interpreted in different ways. A stock’s price cannot be evaluated meaningfully from one number alone.
4. Why does my personal financial plan matter when choosing investments?
Because investing decisions do not happen in isolation. Your goals, financial circumstances, temperament, history with money, and reasons for owning an investment all matter when deciding what is appropriate for you.
Invest With a Plan, Not a Hot Tip
Successful investing involves more than finding something that appears inexpensive today and hoping someone will pay more for it tomorrow.
Understanding what you own, why you own it, and how it fits into your larger financial picture gives you a much more useful foundation for making investment decisions.
Would you like greater clarity around your investments and how they fit into your overall financial plan?
Book a free discovery call to discuss your goals, questions, and financial circumstances.
This article is for educational purposes only and does not constitute individualized investment, tax, or legal advice. Investment decisions and personal circumstances vary; consult the appropriate qualified professionals before making financial decisions.