— by Mitchell Clark, B. Comm.
Speaking of buying low and selling high, it’s a tough thing to accomplish on a consistent basis as an equity investor. If you are a profitable trader, it’s more likely that you’re buying high and selling higher. In most cases, you can usually only buy great companies at low prices when the broader market tanks. Case in point: this past March and November. Alternatively, a stock will be trading low because, operationally, the business isn’t doing well. In either case, your investment risk is high and there are a lot of factors to overcome before you can make any money.
Time is always your greatest asset in the equity speculation business and it’s also your greatest problem. At any given time, there usually are very few attractive stocks to consider if you want to buy low and sell high. While the stock market is an imperfect system of valuing earnings, it’s also a system that is occupied by a lot of smart people and, if a company has a great story to tell, it’s likely that investors already know about it. This means that the stock has already gone up. So, in most cases, I find that any stock with an interesting underlying story is almost always fully valued. This makes it very difficult to buy low and sell high. Again, when the broader market is going up, most investors are making money by buying high and selling higher. But the big money is always buying low and selling high, and this is why it’s such a difficult thing to accomplish.
I’ve found that being a successful investor takes a lot of practice. Friends always ask me what the latest hot stock is and I usually reply, “I’ll tell you if you can tell me how to drive a golf ball over 300 yards.” Even with the best information, the best instruction and the best equipment, it takes practice to be good at something.
So, one of the best ways to improve your buying low and selling high investment strategy is to generate lists of stocks that have already done exactly what you’re looking for. You can do this on most of the major finance web sites by running free search engines on which stocks are furthest up from their 52-week lows.
By studying why those stocks turned around and what factors contributed to each stock’s capital appreciation, you quickly get a much better understanding of what a successful turnaround stock looks like. This makes it far easier for you to recognize a great opportunity for investment when it comes across your desk.
Of course, this takes time and effort. But, as we all know, there are no free lunches. Tiger Woods has a natural talent, but was never just a great golfer. He has practiced since he was a kid and now he’s the best. The investment business is the same as golf. If you want to win, you have to work at it. Anything else is just blind luck.