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01-10-2021 | Forex Education

Why Can’t We Buy Low And Sell High?

To develop an effective investment plan as an investor, you must first grasp the fundamentals of the markets on a deep level.

Nowadays, the trading technique of "buy low, sell high" is regarded as a passive investing approach. It takes advantage of market motion, whether it's up or down. The marketplaces start to thrive over time, as anybody who has been paying attention would have observed. 

This is known as the "Buy Low, Sell High" approach, and it involves purchasing shares of a firm like Unilever and holding them for five years.

Short-term implementation of "buy low, sell high" is difficult for traders and market investors. Even in hindsight, analyzing highs and lows is simple. But dealing with the uncertainty of the near future makes it all the more challenging. This notion goes against everything we've been taught about psychology and human nature. 

Our biggest worry is losing money, and our worst fear is missing out on new opportunities if equities fall. They frequently employ technical analysis techniques like moving averages and take business cycles into account while making judgments.

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Why is it Particularly Difficult?

Because it's impossible to anticipate whether the market is too high or too low; at what price it's overbought or oversold, it's since "buy low and sell high" is tough. The current value is always lower for bull traders and always rising for bear traders. It's not simple to figure out a stock's intrinsic worth, I'll grant you that. The market may go up and down at any time.

It's made more challenging by the fact that cash flows are procyclical. This is a reference to a more catastrophic market decline. As a result of the current economic downturn, capital flows are drying up, making purchasing at a low point in the market difficult.

When dealing in financial markets, it's normal to feel nervous since the market is both real and fictional, and no one fully recognizes it. When the market declines, individuals tend to become gloomy and choose flight over resistance. Most individuals are pessimistic and seek to minimize their exposure to danger. For a market recovery, the opposite is true. When the market seems to be thriving, why would anybody want to sell and exit?

Is It Relevant to Investors?

This is a sound strategy, in the opinion of most people. In the end, they purchase low and sell much higher, because that's what they do. Is this, however, what today's investors want?

These five guidelines may assist you in putting this approach into action:

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Buy Out-Of-Favour Stocks

Good alpha stocks are those that have a greater intrinsic worth than the cost at which they are now trading, and this is what every investor strives to find.

Investors are looking for businesses with strong growth prospects and the ability to generate wealth for their shareholders. To get the most out of their investment, they'd seek a deal on a discounted stake. People no longer want out-of-favor stocks, therefore they're discounted. Macroeconomic events, business difficulties, or industry-specific recessions may all cause a stock's price to fall, making it seem inexpensive. However, this is not always the case.

Sell In-Favour Stocks

When equities rise in value, investors desire to get rid of their holdings. If, for instance, we anticipate that a business will report strong quarterly results, the best time to purchase maybe until they do so. It would be priced in and we'll have to pay a steeper price once the results are revealed. 

Stocks that are in demand indicate that investors are confident in the company's prospects. This is a situation where knowing when to get out of a purchase position is critical to earning alpha profits (i.e. when to sell). Investors' judgment is put to the test when it comes to market timing.

Behavioral constraints, on the other hand, make this approach tricky to put into action. If a stock's price is rising, investors hang on to their shares until the perfect moment to sell them in order to profit. Due to this, they must sell when prices return to normal or decrease or stay onto it until it reaches its previous level.

Another bias is the worry that if they sell, they'll have regrets about the decision. This even motivates people to pay a premium for what they purchase. While buying while prices are rising or at their zenith may pay off in certain instances, it's generally not a good idea.

Stop Depending on Sell-Side Analysts

They do this in order to provide customers and purchasers with a summary of their research and offer buy-sell-hold suggestions based on their findings. They base their estimations on information gleaned from industry studies, market analyses, and personal experience, for the most part.

When it comes to selling-side research, the issue is this:

  • They're constantly on the lookout for methods to minimize risk. They're afraid of being different because of the consequences. For this reason, a suggestion that is both out of favor and in favor would be seen as an unpleasant one. Being incorrect is OK with them since others are!
  • Instead of suggesting shareholders sell their shares, they want to keep the doors open to new information from the businesses they cover The last thing anybody wants to do is risk their career by making an unpopular phone call.

The aforementioned considerations must be taken into account. Before choosing, it's critical to read a wide range of information from a variety of sources. However, don't let goal pricing lead you astray. The more study papers we have access to, the more prepared we will be. If you have a long list of them, it's easy to overlook some important ones.

To verify market beliefs, one must create their own financial models. They shouldn't simply follow their advice before doing their own research.
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Get Past Your Emotions

People aren't born with an aptitude for investing. The greatest danger we face is from inside. We're wired to react emotionally, which causes us to become terrified in dangerous circumstances and thrilled when things improve. 

As a result, we make poor financial decisions and have a difficult time determining the right time to purchase and sell. When equities are at record highs, we get the impression that everything is perfect and we spend a lot of money. 

In times of market turmoil, we succumb to the urge to sell our holdings. Because we follow the crowd, we don't have a chance of succeeding.

We will be better than the rest of the herd if we can resist our impulses and weigh the benefits of waiting it out. We must actively strive to pause and consider our actions before acting.

Don’t Neglect Fundamental Data

We must utilize basic facts to eliminate any ambiguity and doubt. We should utilize present and past financial records to figure out how much a business is worth. By emphasizing real facts rather than anticipated returns and favorable rumors, sentiment may be removed from the investment assessment process.

Preventing an anchoring bias requires neglecting previous price levels and prospects. Share prices are forecast by investors using historical levels rather than the current performance. Isn't there anything wrong with this picture? Thus, we will make choices that aren't in line with the present circumstances.

It's frustrating to get sucked into this quicksand. Once they've gotten beyond that, they're constantly hoping and hoping for the value to return to where it was.

Conclusion

Although the "Buy Low, Sell High" approach is straightforward, we can't seem to implement it. We can't do anything like this because of the marketplace and our own inclinations. It's abnormal and goes against everything we believe in.

We've all reached a crossroads in our lives when doing the right thing isn't an option. Investing often leads us to these kinds of crossroads. We need to know how to deal with anything like this. It all comes down to being willing to take on challenges that others aren't.

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