Buying High and Selling Low

Buying High and Selling Low

While the Fundamental principle of investment is to buy low and sell high,whydo so many investors do the opposite? It is so because fear and greed over shadow rational decision-making regarding investments.In many cases, Investors buy high to maximise short-term returns instead of tryingto achieve long-term investment goal.

5 Rules to Buying Low and Selling High in the Stock Market

Every investor claims to buy low and sell high in the stock market. No one can argue against this being a good approach. In reality, what most investors are doing is buying high and expecting to sell higher.

This practice is dangerous because it increases the level of risk while simultaneously decreasing the probability of a high return. By definition, value investors actually do buy low and sell high.

Here are 5 rules to follow to ensure you do indeed buy low and sell high in the stock market.

1) Buy Stocks That Are Out-of-Favor

The only way to find a company trading at a terrific value is to select a stock that is out-of-favor – meaning that people are selling the stock for a reason. If a stock is low, it’s low because people don’t like it.

Whether the stock is down due to macroeconomic events, industry specific downturns, or company disasters, the majority of investors will want to steer clear. The uglier a company’s future looks, the cheaper the stock will be.

2.) Sell Stocks That Are In-Favor

Just as out-of-favor stocks are cheap, in-favor stocks are expensive. The logic is simple. If investors are excited about the prospects of a particular company, they will pay more to own it.

This is precisely the time when a stock should be sold, not bought. The brighter a company’s future appears to be, the more someone will be willing to pay you for the stock.

3.) Ignore Sell-Side Analysts

There are two types of analysts: buy-side and sell-side.

A buy-side analyst is a professional money manager who analyzes a stock for the sole purpose of determining whether or not to buy it. By contrast, a sell-side analyst analyzes a stock for the purpose of selling a report of his or her analysis.

The problem with sell-side analysis is that there are some significant career risks which influence an analyst’s opinion.

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