As someone who’s given a number of talks on personal finance and managing your investments, there’s one piece of advice that I keep hearing from people over and over again. “Buy low, sell high”, they usually whisper to me in a sagely tone, as though they have discovered some profound truth that will unlock investment riches. I’ve always nodded along politely, but it constantly gnawed at me in the back of my mind as a not-very-useful piece of advice.
Until one day, as I spent some time seriously considering this maxim, when I came to the startling realization that this advice is not just cliched to the point of ridiculousness. No, it is in fact, one of the worst pieces of financial advice you can ever give to a lay person.
First, let’s get something trivial out of the way: “buy low sell high” is indeed factually accurate and a mathematical tautology. The only way to make money on the financial markets is to buy at a (split/dividend/spin-off adjusted) price that is lower than the price you sell it for. This is just as true a statement as “1+1=2”, and unfortunately, just as useful too.
Every single person already knows that they need to invest in something that is going to grow. You telling them that they need to buy at a lower price than what they sell it for, is doing just as much good as stating that the sun rises in the east and sets in the west. In order for any advice to be useful, it has to provide information that someone can act upon, in order to make better decisions. And in this regard, telling someone to “buy low and sell high” is utterly useless as advice.
Or at least that’s what I used to think, until I realized one day that I was wrong. Yes, on a mathematical level, buying low and selling high is a tautological way to make money. But going beyond that, and looking at the implicit meaning behind the phrase, it actually does influence people towards making different investment decisions. It subtly influences them to make investment decisions that are bad. Decisions that are harmful. Decisions that 99.9% of the public should never ever make. And that is exactly why I term this piece of advice not just useless, but in fact, the worst financial advice of all time.
To understand why, let’s explore the implicit suggestion behind this advice, and how most people try to put it into practice. What is your first instinct when you hear the words “buy low, sell high”? Your first instinct is to ask yourself whether the market is currently low or high. If you answered that the market is currently low, you would then act on this by investing any liquid assets you have. And if you answered that the market is currently high, you would conversely act on this by selling off some of your portfolio and parking your money in liquid/safe assets. This is after all, the most straightforward way to “buy low sell high.”
Unfortunately, this is also exactly the wrong thing to do.
Consider a few examples. Suppose the stock market has dropped 25% in the past year. Does that mean that stocks are now “low” and therefore, you should start buying more of it? If you answered yes, you’ve arrived just in time to lose another 25% from 2002-03.
Suppose instead that the stock market has doubled in value in the last 3 years. Does this mean that stocks are now “high” and therefore, you should sell your investments or at least stop buying new ones? If you answered yes, you just missed out on the 50% growth that occurred from 2012-15.
So how exactly does one go about predicting when the stock markets are “low” or “high”? Here’s a dirty little secret in the financial industry: no one has a clue. There are armies of Harvard-MBA-educated financial wizards working on Wall Street, at hundreds of mutual funds, earning millions of dollars, trying to time the market and predict its highs and lows, and the vast vast majority of them are no better at it than a monkey throwing darts. If you think that you have somehow cracked the code and have some special insight in predicting market highs and lows, you need to quit your job and start working in finance where every Hedge Fund will welcome you like the second coming of Christ. (Warning: Don’t quit your day job – you’re not Christ)
The amount of damage that people have done to themselves, by futilely trying to time the market, is immense. By constantly buying and selling, they incur unnecessary transaction costs and tax liabilities. By parking their money in low-yielding investments, waiting for the “right time” to buy stocks, they are foregoing the 7% annual returns that the stock market yields on average. Every time someone allows their investment decisions to be guided by the “buy low sell high” philosophy, they succeed only in hurting themselves.
Which brings me to the advice which you should actually follow. The advice that should replace and put to rest the dangerous “buy low sell high” snake oil. The advice that will actually protect you and your long term investment prospects.
Buy when you have money to invest, and sell when you need the money.
Don’t try to guess whether the stock market is “high” or “low”. Invest your money when you have disposable cash. And liquidate your investments when you need the cash. Everything else is bunk.
8 thoughts on “Buy Low, Sell High: The Worst Financial Advice of All Time”
I think your advice is good for people that don’t want to put the daily research into market trends, however there are studies that show aptly choosing when to go all in and when to pull out can yield 20-30 percent increase in returns.
It’s impossible to predict the absolute top and bottom, but I argue it becomes painfully obvious when the market is extending past its fundamentals to anyone putting in 30 mins of reading a day. Take the situation right now for example. The market is basically at an all-time high and earnings are down across the board. Is it a good time to have all your money in the market right now? Probably not. Conversely, if the market undergoes a 10-20% correction and there are still healthy companies/sectors that would be a good time to strongly consider buying. So what if it goes down another 5-10 percent, as long as you wait 1-2 years odds are in your favor that you’ll be on the upside.
Buy Dividend paying companies, and never sell …. get paid to own. Its not a gain or a loss if you don’t sell it. The caveat being you need to make sure you still believe in the company and expect it to do well over the long term. Good luck !
This doesn’t happen more than once or twice a year but I do sell when the market offers me a fat gain but then I simply buy another undevalued dividend stock. I also pay attention to record dates and stuff so I don’t sell just before then, done that a few times.
That makes sense. Different strokes for different folks. Good luck and happy investing !
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