Buy High, Sell Low: A Different Way to Think about Investment
Everyone wants to buy cheap stock and sell it off later for a huge profit. While these successes do happen, it’s inconsistent. By changing the criterion for buying and selling, you can enjoy more consistent returns on investment. Remember: buy high, sell low.
Relative strength tells you what to buy
The process of buying high and selling low starts with changing the basis of buying stocks. Instead of looking at stocks as a price tag, look at their relative strength. Relative strength is a description of how well a stock is performing against the average of a stock index. Stocks that are performing well and gaining in value will be more expensive (hence “buying high”). However, their return on investment is also going to be proportionately higher. You buy stocks that are high and have plenty of relative strengths.
Eventually, even high performing stocks will start to slow down. Their relative strength will diminish as they begin to perform closer and closer to the average of the index. Eventually, they’ll be under performing, but before that happens, you’ll have sold them and bought something else that’s high. Thus, you’re never stuck trying to wait out under performing stock.
Stops you chasing fads
Impulsive investing is a great way to lose money. Many people see a hot stock that’s suddenly jumping in price and they see a missed opportunity. Think about pop culture fads. When romantic vampires became the latest trend for teenage girls, the people who started writing vampire romances were already too late. It takes too long to write a book and get it published. By the time a fad has hit the shelves, it’s too late to get on board. Many people view stocks the same way. This is true if your only goal with stocks is to buy low priced stocks and sell them once they’ve rocketed upwards.
Relative strength forces you to stop thinking about stocks as fads, and start looking at stock performance over time. If a stock is doing well and shows no signs of slowing its climb, it makes sense to invest in it even at a high price. It will still go up from there. On the other hand, if a stock is still doing well against the average, but not as well as it recently has, you know it’s time to sell—or skip out on investing.
Plays on the law of averages
Buy high, sell low plays to the laws of averages. Instead of naming a monetary figure and focusing on the price of any particular stock, it looks at that stock’s performance. You can invest as much as you can afford and reap a general benefit. Everyone would love to be someone with a sixth sense for stocks. It would be great to have invested in Apple right before they unveiled the iPod, for example. These stock successes simply can’t be counted on. A reliable investment strategy is to buy high, sell low, and let returns on investment speak for themselves.
Buy high, sell low is a simple alternative to trying to “play” the stock market. You can avoid dealing with fad stocks and industries. Let relative strength show you which stocks you should invest in.