Arguably the most basic but probably the most important phrase used in investing is: ‘buy low, sell high’. This phrase distils the essence of successful investing into a simple, easily digestible principle.
At its core, this strategy suggests purchasing assets when their prices are depressed and selling them when their values appreciate. Sounds easy right?
However, the practical application of this is far from straightforward. Investors are humans and they face a web of psychological, market, and economic complexities that make its execution a formidable challenge for both professional and retail investors.
The reasons for this complexity stem from factors such as the ‘fear of missing out’ (FOMO), the pervasive influence of investor emotions, and the inherent uncertainties of market timing.
FOMO is a powerful force in financial markets, driven by the human tendency to avoid loss and the desire to participate in lucrative opportunities that others are capitalizing on. When asset prices start to rise, investors often buy assets out of fear of missing out on potential gains, leading to purchases at elevated prices rather than waiting for a more opportune, lower entry point. Conversely, when prices are falling, the same fear can compel investors to sell off assets to avoid further losses, often at a time when they should be considering buying.
This reactionary behaviour is the opposite to the ‘buy low, sell high’ strategy but is a common trap due to the emotional responses elicited by market volatility.
Investor emotions play a significant role in making the ‘buy low, sell high’ strategy more complicated than it appears. Market trends can evoke a spectrum of emotions from greed to panic, influencing decision-making processes. When markets soar, greed can lead to overbuying at high prices, while panic during downturns can result in the premature selling of assets that might rebound. The difficulty in maintaining emotional composure and objectivity in the face of market swings cannot be overstated, and it underscores why many investors struggle to adhere strictly to the principle of buying low and selling high.
Professional investors, despite their experience and access to sophisticated analysis tools, are not immune to the challenges that complicate the ‘buy low, sell high’ strategy. The pressure to achieve short-term performance targets can lead to risk-taking behaviours that deviate from this principle. Moreover, professional investors are often under scrutiny from clients who may demand actions that align with the prevailing market sentiment, rather than a disciplined investment strategy.
Retail investors often lack the market knowledge or experience of their professional counterparts, making them more susceptible to emotional decision-making and herd mentality. The proliferation of social media and the 24/7 news cycle can amplify these tendencies by constantly bombarding investors with information that might provoke fear or greed.
Given these challenges, maintaining composure and a steadfast commitment to investing based on valuation and price is crucial. Investors must develop a disciplined approach that involves setting clear, long-term investment goals and adhering to a well-thought-out plan.
So, while the principle of ‘buy low, sell high’ might seem straightforward, its execution is fraught with challenges that stem from emotional biases, market uncertainties, and the complex dynamics of investor behaviour. Both professional and retail investors must navigate these waters carefully, armed with discipline, research, and a clear investment strategy.
Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.
