Buy Low and Sell High — It Takes Courage to Follow this Basic Strategy

by Mitchell Clark, B. Comm.

This stock market really surprises me, but I suppose we have to keep the market’s recent strength in perspective. While the gains now seem substantial, it’s only because the market tanked so significantly in the months before. Even if the current strength in stocks was sustainable over the next two quarters, there would still be a long way to go before getting back to where the market was before the subprime credit crunch.

Recent trading action clearly illustrates the benefits of buying low and selling high, and it also illustrates just how difficult it is to do so. Seemingly, the timing itself is kind of obvious. It’s the fear of the unknown that’s the big obstacle to overcome. It takes courage to step up to the plate and buy stocks when the financial world is seemingly coming to an end.

But, you can make good money when there is a lot of fear in the marketplace and the key, in my view, is to do so with solid, large- cap companies. When confidence is gone, forget smaller-cap stocks. You do, however, have to have a feel for what the marketplace wants or would want to own when the dust settles.

The perfect example is the Canadian banking group of stocks, which all trade on New York. These stocks succumbed to the massive liquidation in stocks, yet their businesses were solid. So, while their stock prices were crashing along with everything else, the opportunity to acquire companies with long-term track records of increasing dividends was apparent. Given that the Canadian banks held an immaterial amount of bad loans in the U.S., and the fact that investors wanted to avoid financial stocks in general, valuations got ridiculously attractive.

Since the beginning of the year, most Canadian banks stocks are up over $10.00 a share. Since the March low, some of the stocks in this group have actually doubled in value while still paying solid dividends.

So, the recent stock market turmoil has proven once again that you can make (and lose) money in any kind of market. I have to say that equity institutional investors have an advantage in this regard, because, no matter what is happening in the broader market, they get paid to be invested in stocks. The investment manager still gets paid to sit around and pick and choose among the best opportunities in the marketplace. Accordingly, the trading action and the fear in the marketplace are less onerous on the institutional investor making the stock selections. Individual investors often just freeze up and choose
not to participate because of the turmoil.

At the end of the day, a really good investor goes through the process of creating stock market scenarios on an ongoing basis in any kind of market. This is the key to buying low and selling high. If this scenario happens in the stock market, what action would I take as an investor? What stocks would you want to buy if the market crashed tomorrow?