Buy low sell high is a basic investing strategy that has been around for a long time. It has worked quite successfully for some investors. But buy low sell high is just one of many strategies available to investors.
The allure of buy low sell high is simplicity. Who can argue with the simplicity of making an investment in a stock or other asset when the price is low because it is out of favor with the investing community for whatever reason? And then hold the asset until it reaches whatever high price target you set for it; at which time you would sell.
Investors with a buy low sell high investing strategy are often referred to as value investors. These investors are able to spot assets that are priced well below their intrinsic value. Such investors then wait for the market to ultimate see the value of the asset at which time the price will increase. Once the target price is reached, the investor sells the asset and moves on to the next low-priced asset.
One of the greatest buy low sell high investors was Warren Buffet, who grew Berkshire Hathaway into a $650 billion market cap conglomerate by being able to spot stocks selling well below the intrinsic value of the business they represented. He then successfully waited for other investors to drive the price up as they spotted the same thing about the business that he did, only much later.
There are some drawbacks to a stock market investing strategy focused on buy low, sell high. The first drawback is that sometimes low-priced stocks can go even lower. As there are no guarantees in the stock market, even if a stock price is well below the intrinsic value of the business, there is nothing stopping the price from going lower before it starts to rise. As a result, you need to have a high conviction level in the intrinsic value of the business and a patience to wait it out if it takes a long time for stock price to rise.
The second potential drawback in a buy low sell high investing strategy for the stock market, is that if a company is performing well, why sell it just because the price of the stock rises to an arbitrary price target that you set? If the underlying business is performing well, sometimes it is best to not “sell high”, and instead just let the stock continue to march higher as long as the business continues to perform well. Many a fortune has been lost in the stock market by selling too soon.
Think about all the investors that sold Amazon, Alphabet/Google and Apple one, five and ten years ago because the business was determined to be fully valued. They are kicking themselves for sure as each company is approaching or has breached the $2 trillion market capitalization.
For those value investors that are looking for a high-quality stock that is trading at a depressed price right now hoping to ride the stock price higher in the months ahead, look no further then Viacom/CBS (ticker VIAC).
Viacom is a major media and entertainment company with a sizable market capitalization of more than $25 billion. Some of the assets they own include Paramount Pictures, Pluto streaming network and the CBS television network.
The media and entertainment industries are doing quite nicely and Viacom’s brands are successful in that niche.
Viacom generates massive profits and cash flow annually. And what makes Viacom cheap is that it trades for just about 9 times 2021 earnings, which is less than half the market multiple of more than 20 times earnings.
Although Viacom has a steady business and is a massive profit generator, its stock price has been quite volatile in 2021. Starting the year at around $50 a share, it got as high as $100 a share, before collapsing and stabilizing at its current $41 a share stock price. We don’t expect the stock price to go much lower than where it is today and could easily get up in the $60 to $70 range by the end of 2021.
And finally, the fact that VIAC pays a 2.4% dividend means you get paid while you wait for the stock price to get to a more reasonable higher level, given the consistent profits that are generated by this blue-chip business.
Buy low sell high is a solid investing strategy but does have some drawbacks as outlined above.
The way to build real wealth is to buy high quality stocks of businesses that are involved in undeniable trends and hold them for decades. As the sales and cash flow of the business compound over long periods of time, your net worth invested in these businesses will compound exponentially as well. Buy a little stock of the businesses now and add a little every year and watch your net worth soar.
Think about Netflix for streaming, Amazon for online shopping, Apple for the smart phone or Alphabet/Google for internet search. A small amount of money invested in these businesses early on in their tenure in the public markets would equate to a multi-million net worth for investors today.
But to achieve the effects of compounded wealth over long period of time you need to hang on and not “sell high”. Each of these four companies was labeled overvalued many times over the last couple of decades and many investors sold to buy a “better company with a low price”. No doubt anyone who did that is kicking themselves because it is unlikely that any of those “better companies” had their stock price perform even close to the four mentioned above.
Another way to say it is you don’t need to sell a stock just because it is considered highly priced or reaching its fair value. If you can pick the right companies that are capitalizing on megatrends, then continue to hold the stock as long as the business is fundamentally strong and growing.
If you are looking for stocks to buy in the buy high and then buy a little more as the price goes up investing strategy, you need to look at a couple things. Ideally you want to identify long term trends that will continue to thrive in the future. And then you want to identify market leaders in those areas. Identified correctly this creates enormous compounding potential for your investment capital. Consider these long term trends and the market leaders within them:
Buy low sell high is an investing strategy that can work for investors when picking stocks. Look for companies whose stock price is trading lower than the businesses intrinsic value.
But consider other investing strategies as well. If you select the right companies within the right megatrends you can continue to hold those stocks for decades as long as the business prospects continue to look good. For these companies you can feel comfortable adding additional shares from time to time and holding them for decades.
Use the examples in this article to help you get started with your research.