What is the Buy Low Sell High Investing Strategy?

Key Takeaways

• The “buy low, sell high” investment strategy means purchasing securities for one amount, then selling them later at a higher price.

• For it to be successful, the approach calls for active tracking of certain indicators.

• The strategy is not a guaranteed way to equal or top market performance.

If there is one investment adage that is so common and enduring that even many non-investors have heard of it, it is likely “buy low, sell high.” The strategy is succinct and memorable.

However, most active stock traders will likely concede that the approach is challenging because it is largely all about timing. What is the “buy low, sell high” investing strategy?

That is explored below, along with an alternative use for the approach.

What Does Buy Low, Sell High Mean?

The “buy low, sell high” investment strategy calls for buying securities such as stocks at one price, then selling them at a higher price later.

The philosophy is largely based on attempts to time the market, which can be very difficult. However, investors adept at identifying trends and assessing market cycles can prospectively experience considerable returns. The wider the chasm between the asset’s buy and sale price, the bigger the profit margin.

Also, if fear and panic are suppressing stock prices, such a situation could present opportunities for buy low, sell high investors. Those who disregard such panic can purchase stocks at a discount, and experience gains later when prices go up again.

Further, some investors are attracted to the strategy because it can give them a greater opportunity to come out on top of the market – if their holdings do better than anticipated.

How Does the Buy Low, Sell High Strategy Work?

Investors who can make clear-eyed, unbiased assessments of the market, and can see a herd mentality in effect, can potentially benefit by buying low and selling high.

The rub is that it is easy to determine in retrospect whether a stock was mispriced, and perhaps even why. However, it is not so easy in the moment, as prices are intertwined with the emotions and psychology of market participants.

What is an Example of the Buy Low, Sell High Strategy?

Most investors who engage in buy low sell high do so to generate the highest-possible returns. By illustration, say a day trader one morning buys shares of ABC stock at $10 each, then in the afternoon, if ABC’s stock’s price rises, sells the shares for $30 each. The end result is a $20 per-share profit, minus commissions, or trading fees.

What Must Investors Consider When Buying Low and Selling High?

There are factors to consider when employing the buy low, sell high strategy, including:

Moving averages. Commonly used for technical analysis, moving averages refer to an asset’s average price over an established period. They can help investors see where, over time, stock prices have bottomed out or topped out. They also can help when comparing stock pricing.

Business cycle. This is the rise and fall of economic activity an economy experiences over time. For example, if the economy is growing and is in a robust phase, stock prices may be on their way up, too. By contrast, stocks may fall following a peak in economic growth.

Investor Bias. This is a behavior pattern that influences how investors respond to market changes, and should be guarded against. For example, news of a looming interest rate increase could cause panic selling, which can drive down prices.

On the other hand, an unexplainable zeal for a certain stock, with no consideration of the state of the market or timing, can lead to higher prices and a market bubble. The latter is a period in which current stock prices significantly surpass their intrinsic valuation.

Stock pricing trends. Investors who utilize the buy low, sell high approach usually watch technical indicators or pricing trends to help them time their moves.

What are the Benefits and Drawbacks of Buy Low, Sell High?

Pros and cons of the buy low, sell high strategy, include:

Benefits:

• Possibility of high returns. The wider the gap between the stock’s buy and sale price, the greater the profit margin. Investors must be able to spot trends and read the market cycle, though.
  
• Opportunities for discount purchases. Investors who can ignore herd mentality when it comes to trading can potentially buy stocks at discounted prices, and “win” again once the market rebounds.
  
• The potential for portfolios to perform better than the market, compared to those who engage in buy and hold investing.

Drawbacks:

• It is difficult to time the market perfectly. There is no fool-proof way to know a stock’s direction all the time. The main problem is that trends and averages do not show variables, such as company news, that can influence stock prices.
  
• Could lead to time out of the market. Investors typically do not purchase when prices are on the rise. Rather, they seek to buy when prices drop. The problem here is that the approach could result in substantial time out of the market altogether. In turn, that could make it more difficult to reenter the market without the risk of losing what will likely be a significantly greater initial investment.
  
• Biases can influence decision making. Investors must be careful not to allow biases and herd mentalities to do damage to their portfolios and cause them to lose capital on investments.
  
• Pricing does not provide a complete picture. While it can be useful to track stock price trends and moving averages, they do not tell the whole story in terms of price change drivers. That is why it is vital for investors to factor in other variables including consumer sentiment and world events.

Does the Buy Low, Sell High Strategy Only Apply to Stocks?

The buy low, sell high strategy does not apply exclusively to stocks. It can, in fact, be used when investing in nearly any asset class or security. For example, many investors in alternatives such as collectibles use consumer sentiment trends to help time their buys and sells.

This matters because more investors are turning to alternatives for their low correlation to the stock market. Instead of building portfolios that are wholly dependent on the volatile market, investment managers and experienced traders increasingly recommend diversifying holdings with assets other than stocks and bonds that have the potential to generate passive income.

Diversification through Alternatives

Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.

Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.

In some cases, this risk can be greater than that of traditional investments.

This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform. However, that also meant the potential for the exceptional gains these investments presented were also limited to these groups.

To democratize these opportunities, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.

Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10000.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

In Summary

While “buy low, sell high” as a strategy can be fraught with risk, it can sometimes work in combination with other methods.

The overarching issue, though, is the inherent volatility of the overall market. Because alternatives are not directly tied to that market, they might be a smarter use for the buy and sell approach and can diversify overall holdings.

All securities involve risk and may result in significant losses. Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.