Buy Low Sell High Is Dead

Buy Low Sell High is Dead

This post concludes one year of trading. Okay, I have been busy working on a textbook (under contract with a major publisher) so I haven’t really been all that active. But then again, that is part of the one-year experiment. Who really has time to actively trade stocks after all?

I ended up cashing out my Ligand Pharmaceutical (LGND) stock this morning. I had 15 shares sold at $95.40. My one-year totals:

Starting Investment: $1,000

Ending Cash Balance:

$ 0

Actual Annual Return: 43.37%

Trading Fees ($10 per trade): $120

Annual Return excluding fees: 55.37%

Of course LGND is currently at $99.13 98.17 as we speak so yes, I left some money on the table. But that finally brings me to the point of the post. Buy Low and Sell High is BAD advice. Why? It’s not like you want to buy high and sell low.

Trying to buy low and sell high is a dangerous game.

Many people believe that if a stock is falling then it must soon be on its way up soon. But a lot of times that is just not true… especially if you are an active trader. Perhaps investing in the long-term that will make sense, but maybe not. Sometimes the stock is falling because it is a bad business model and it cannot be sustained. Maybe it will bottom out and collapse or hover near those lows for many years to come. A falling stock price indicates that the market has lost confidence in that stock. Nothing says they will ever regain that confidence.

So what advice do I recommend?

Buy High and Sell Higher

Why? Buying high and selling higher means you are buying something on its way up and not down. Granted I only have one year of experience at this so far (actively trading), but I also read and do some light research. What I have found out is that when stock is rising, assuming sound fundamentals and the right market conditions, you can buy on the way up and then hop off while it is still on the way up. So I buy high and sell higher. I will never get lucky and guess the lowest point to buy and the highest point to sell, but I will also be taking less risk by only buying the right stock in the right conditions.

When you are actively trading it is less about what you think the company will do and more about what you think other investors, especially the major investors, think the company will do and how they will react to it. They drive prices up and down.

I will continue to share more of what I learned and keep you posted as I make any new investments. I will do a better job of posting each time I make a trade so you can follow along if you want.

This post is part of a series on Investing Newbies. The first post was in March 2015. If you want to read the previous post click here. If you want start from the beginning click here.

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Bill Pratt

Bill is an Assistant Professor of Business at Piedmont Virginia Community College. He speaks on topics related to personal finance on college campuses across the country and is the author of multiple books on personal finance. He left the financial industry to focus on helping people become personally and financially successful. He lives in Charlottesville, VA with his wife and their three pets.