Buy Low, Sell High? Your First Step Is to Buy Low ...

By Austin Pryor

After the old accountant retired and turned in his keys, his co-workers were eager to search his desk for the mysterious piece of paper he kept there. Each work day, like clockwork, he would arrive at his desk, unlock the bottom right drawer, remove a small 3x5 card he kept there, study it for a few moments, and then return it to its safe resting place under lock and key. A small crowd gathered to see what the accountant had written that he studied so faithfully. The card read, "Debits go on the left, credits go on the right."

Sometimes we need to be reminded of the basics. Perhaps it would help you to write down your investment goals and refer to them frequently. One of them would likely be that, generally speaking, your long-term mindset is to "buy low and sell high." You may have noticed by now that this is a devilishly tricky thing to do consistently well. That's why having a plan in place to guide your decision-making is so important (see Make Sure Your Investment Decision-Making Is Inside-Out).

Here is a bit of self-evident logic that your plan should take into account: You can't buy low and sell high if you . . . sell low instead of buy low.

Of course, you say, that would be self-defeating. Yet, many investors do indeed "sell low" — especially when grim news reports have raise their fear levels. Here's a small collection of financial headlines I collected in March 2008, all appearing in the span of three days:

"Economists say recession is here"
"Consumer confidence slides to 16-year low"
"Homebuilders confidence mired near record low"
"Oil plunges on fears economy is worse than thought"
"Inflation fears drive gold above $1,000 level"
"Dollar plumbs historic lows"

Sounds awful. And many investors were selling. But consider this question: What would you expect the news to be like when stocks are low? Bad, of course. If the news is good, stocks are up.

We might paraphrase the old "buy low, sell high" axiom as "buy when the news is really bad (because that's when stocks are low), sell when the news is really good (because that's when stocks are high)."

Fear-generating headlines like those above can cause investors to momentarily forget that when prices are low, they should, if anything, be buying. The idea is to accumulate more and more equity shares over a lifetime of investing, riding the long-term prosperity of the U.S. economy.

A plan of dollar-cost averaging (DCA), where you invest the same dollar amount at regular intervals (e.g., every payday when an employee contributes to a 401(k) plan account), is great for helping you do this. When stocks are down, i.e., when your investment dollar is buying you more shares for your money, you might even consider stepping up your contributions if possible.

Having said this, let me make two clarifications. First, continuing to buy low is prudent only in broadly diversified portfolios. When your additional purchases go into an indexing approach such as SMI's Just-the-Basics strategy, or an actively-managed portfolio like SMI's Fund Upgrading strategy, the high degree of diversification helps protect you from isolated blow-ups. Continuing to buy into the falling share price of an individual stock (like that of Bear Stearns or Enron) can be foolhardy. So, yes, buy low, but only in a fully diversified portfolio where your ultimate success depends on the overall economy, not a single company or industry.

Second, buying low doesn't mean prices can't go lower. How low is low, anyway? You won't know until months after the final bottom. All you can do is determine to be a buyer at prices that appear low relative to their recent highs, or perhaps in relation to recent or projected earnings. The market will periodically dip 10-12% below its highs. That's unnerving, because you never know when the ride down will be over. But "buying at a discount" is a sensible act if you're a long-term investor (say, a 10-year time frame before you'll need this money).

Successful long-term investing requires patience, fortitude, and the ability to think of market reversals as opportunities to be embraced.

Sound Mind Investing. Sound Mind Investing exists to help individuals understand and apply biblically-based principles for making spending and investing decisions in order that their future financial security would be strengthened, and their giving to worldwide missionary efforts for the cause of Christ would accelerate. In other words, we want to help you have more so that you can give more.