Why Buy Low And Sell High Is Useless Advice

Why Buy Low And Sell High Is Useless Advice

I hope this will be the last negatively titled article. So much bad advices have been given out of context by gurus such that I felt that someone have to make a stand when it comes to these advice. The previous article Why Buy Term And Invest The Rest Is Bad Advice captured many eyeballs but I would much prefer to build a personal finance site that is more positively charged.

Today, the article focus mostly on the strategy buy low, sell high and why it is useless.

Why Buy Low And Sell High Is Useless Advice

Why Buy Low And Sell High Is Useless Advice

 

What is Buy Low and Sell High?

The intention for investment is very simple. It is to make money (repeat this in your mind). When you make an investment, you must have every intention for your investment to grow in value in future. Take an example of Facebook (FB). In 18 May 2012, the share price of FB was $38. When you invest into FB at that time, you would have strongly believe it would grow. Today, 9 July 2021, the share price is $350. You would have made 816% by “buying low and selling high”.

Why Buy Low And Sell High Is Useless Advice Meaningless Facebook Stock Chart

Why Buy Low And Sell High Is Useless Advice: Meaningless Facebook Stock Chart

This advice is often easy to say but in reality very difficult to do. Worse, there are many experts out there who will confidently claim that they have a secret system to buying low and selling high.

I offer you 3 reasons why this advice often does more harm than good.

 

It Assumes A Trading Mindset

If you see any guru who preach about “investing in the long run” and “buy low and sell high”, run away and run away fast. These 2 concepts simply DO NOT mix well together.

The notion of “buying low and selling high” suggests that there is a certain price that you would like to buy and let go. Often, these entry and exit points are obtain from the study of charts (technical analysis). In most cases, the timeframe of this strategy is shorter in nature to make a profit in the stock market.

If you have invested into FB for the long run in 2012, you would be in a lot of pain thinking when to sell simply because FB would have repeated tested the all time highs every few months. The whole intention of “investing in the long run” would be thrown off course because this person is constantly thinking when to sell. Simply put, “investing in the long run” and “buy low and sell high” do not mix well.

At this juncture, I would like to state that if this individual is having a trading mindset. The “buy low and sell high” make sense. It is the essence of his investment thesis as much as “trend is your friend”. But not if you are a long term investor.

 

It Assumes A Symmetry of Returns

The phrase “buy low and sell high” implies that the stock market goes up 50% of the time and goes down 50% of the time. I believe that it would work well in that situation.

However, in reality this isn’t the case. Bull market are persistent. Bear market don’t last very long. Therefore, the cost of waiting for the “low” is extremely high.

To illustrate this case, UBS demonstrated this with 3 portfolios.

#1: Buy and hold

#2: Sells when the S&P 500 hits a new all-time high, buying back into the market after a 5% drop

#3: Sells at S&P 500 record highs, buying back after a 10% correction

Starting from 1960, an USD$100 investment would be worth the following in 2018 (when the article was written)

#1: $28,645 (Yes. No typo here)

#2: $422

#3: $390

You can see that strategy #1 beats the other “buy low, sell high” strategy hands down. The cost of waiting is terribly high if you follow a strict “buy low, sell high” strategy.

 

It Assumes A Strong Psychological Mindset

While, it is almost impossible to know when the worst days are, buying low is not easy at all. I will take the most current event as an example.

Disclaimer: This is not a buy/sell recommendation.

Alibaba (BABA) stock price plunged down to a new low at $205 (9 July 2021).

In 27 March 2018, revenue for BABA is 226.9 B Yuen. Share price was $192.

In 31 March 2021, revenue for BABA is 798.6 B Yuen. Share price was $229.

While revenue increased 250%, share price only grew 19%. This new low has been attributed to the CCP (Chinese Communist Party) clamping down on Chinese Technology Stocks. Several gurus are calling “sell” because of regulatory risk. Many bloggers are also selling BABA because of “opportunity cost” and believe that money could be put into other counters that is in momentum now. Honestly, I don’t blame them. It is not easy to see your stock price being beaten again and again. It isn’t psychologically easy when price is down. Nobody likes to be wrong. Nobody likes to be wrong for days, months or years. Often, people may even sell at a lost because it may be psychologically difficult.

Long term value investors however are adding into BABA. Among which, Charlie Munger and Mohnish Pabrai are the more noticeable names that are adding into BABA.

 

Final Thoughts

Disclaimer: I have mentioned some companies above for illustrative purposes. These are not and should not be taken as a buy/sell recommendation.

Personally, I think “buy low and sell  high” is an over-simplistic investment thesis. While, it is easy to explain it in theory, reality often paints a different picture. I feel that you should focus on simple, actionable and personalized investment thesis to help yourself achieve the financial freedom that you want.

 

Chengkok is a licensed Financial Advisor since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.  

He will be happy to provide professional advice to you personally.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

The $1 SRS Strategy Retirement Age

The $1 SRS Strategy

It is 45 days before the end of the year. Have you accomplished your 2020 goals? Whether it is a financial goal or a fitness goal, the good news is that we have another 52 days left.

In the 6 Levels Wealth Karate, we talked about many strategies while you embark on your wealth management journey. Today, I want to congratulate each and every one of you for being invested in your financial journey. If my blog has helped you, I would appreciate if you could comment how you have benefited in the comments below.

If you have not started, it’s okay. This article will be the easiest way to start to start.

 

Supplementary Retirement Scheme (SRS)

Previously, I have already talked about SRS. In this semi viral article, I described the 5 things you need to know about SRS when you are 40 and older. Personally, I believe that SRS may be suitable for someone who is 40 years old and above.

This is because it is likely that your income is more than $80,000. There will be great substantial tax savings. Plus, we might need liquidity for housing/renovation/marriage/children purposes before that. This will post an liquidity issue. Someone 40 and above might fit into such a category.

In the “best case scenario”, you will be withdrawing $40,000 per year and that income will be tax-free (assuming you are not working).

Please read the above post to learn more about the details.

 

The $1 SRS Strategy

This strategy is the most important strategy of all. This is because we need to first start!

Yes. Most goals failed because they have not even started. Think about it, did you “renew” your 2019 new year’s resolution in 2020 because you didn’t accomplished it in 2019? It need not be a financial goal. What about your fitness goal? What about your learning goal? If this seems like the case, you have the opportunity to change now. By doing so today, you will shave off up to 3 years of your retirement age. If that is not enough, all it takes is $1.

How is that possible? Let’s gather a few facts.

You can make penalty free withdrawals from your SRS on or after the statutory retirement age (currently at 62) that was prevailing at the time of your first SRS contribution. In 2019 National Rally Speech, PM had announced the retirement age to be raised to 63 in 2022 and 65 in 2030.

This will mean that if you still refuse to open your SRS account by 2022, your penalty free withdrawal will increase by 1 year. If you still refuse to open your SRS account by 2030, your penalty free withdrawal increase by 3 years.

The minimum that you can contribute is a grand total of $1. If you are above 18, all you need is to contribute $1 to “lock in” your retirement age to be 62.

The $1 SRS Strategy Retirement Age

The $1 SRS Strategy Retirement Age

 

Your 1 Minute Opening Guide

You no longer need to go to the physical bank branch to open up your SRS account anymore. All it takes is 1 minute.

This is the way I do it. My personal SRS account is with DBS (for convenience sake). You can also open your SRS account with OCBC or UOB. It is only 2 steps, click click and you will have an SRS account. If you are unsure how much to contribute, you can always contribute $1 to your SRS account first to “lock in” your retirement age.

The $1 SRS Strategy DBS

The $1 SRS Strategy DBS

This guide serves to let you under how $1 can lock in your statutory retirement age. In fact, do it now! Log into your DBS/OCBC/UOB internet account and do it now!

 

What can you do with your SRS account?

By popular demand on my Telegram group, I’m currently writing on how to invest using your SRS account now. If you have any questions that you want to be addressed in that article, do drop me a comment and I will include that in the article.

Otherwise, this is one question that is commonly asked: 3 things you need to know about SRS if you plan to leave Singapore. This is for people who wants to live in another country during retirement.

 

Final thoughts by Wealthdojo

We wish you the very best in your 2020 goals. Otherwise, we hope that this will be your first financial milestone.

 

Join my Telegram Channel for a tip a day! In Wealthdojo, we dedicate a small amount of time daily for learning new things. Continuous learning is one of the greatest secrets of success.

For those of you who want to turbocharge your journey, contact me at chengkokoh@gmail.com. I would like to hear from you what your experiences are currently and from there, we develop a plan specially catered just for your journey.

We wish you all the best! Stay Safe and Take Care!

Chengkok, Sensei of Wealthdojo.