Buy low and sell high. That’s how you play the stock market and what could be simpler than that?
Well, it is simple. And it sounds nice. But for the most part, it’s an investment fallacy. It’s not what Warren Buffett does and you shouldn’t do it, either.
To start this discussion, let’s look at the tech-stock dominated NASDAQ index. Prior to the last two recessions, the NASDAQ index reached a peak of 6,948.75 points. That was in March 2000. It then fell to a late 2002 low of close to 1,000 points before skittering along for the next six years to a new peak of 3,000 points in 2008. It then fell again in the so-called Great Recession, which ran from December 2007 through June 2009. Now it is back to close to 5,000 points, the highest it has been since March 2000.
What this tells us is that the NASDAQ index was overvalued in March 2000 just prior to what is called the Dot Com Bust. The new peak of 5,000 points, while lower than March 2000, is thought to be a more solid value than the unrealistic and speculative peak of 6,000 points way back when. So, which would you rather own, a solid 5,000-point stock or a speculative 6,000-point stock that reflected the market’s guesswork on the value of Internet companies that were widely popular but didn’t even sell a product?
Despite what it looks like, the NASDAQ’s value now maybe more substantial than it was in 2000. Then it was a highly speculative market. Now, it is a more realistic one.
That said, the basic strategies for investment remain the same – and they are not really built on the concept of buying low and selling high, except for a few speculative investments. Unless you have a crystal ball, what you are investing in should be long term stock trends. You might say, philosophically, you are investing in time.
Yes, there are wildly dramatic success stories out there, just as there are wildly dramatic stories of people going broke on Wall Street.
So, let’s look at Warren Buffett for a moment. He’s frequently mentioned as the most successful investor of all time. He started his life in a modest home in Omaha, Neb., and went on to become one of the richest men in the world.
But he doesn’t believe in buy low and sell high at all. What he believe in is long-term investment.
In other words, Buffett only believes in buy low and sell when a company is beyond hope.
Buffet likes to buy low and hang on for dear life. Why stocks for a company that is in a low stretch, when you know the long-term prospects are good.
Any company that still has a pulse can still revive and go on to make a fortune. Look at Apple Inc. It is among the largest companies by capitalization in the world and it got there on the backs of its staggeringly successful smart phone business. But for a few decades there, when it just sold computers, Apple was kind of a stock market dog. It had many lows before it found its true calling. If a wise investor had sold Apple stocks when they were low, they would have missed the wild valuation that came about relatively late in the company’s history.
The real trick is buy low and hold on through thick and thin until the economy or fate props up your investments. When the recession hit, Buffett, for example, bought a railroad and invested $5 billion in Goldman Sachs, a huge Wall Street bank.
In other words, he invested in stodgy, long-term projects. With global warming on everybody’s mind, railroads, his research team decided, had a place in the greater scheme of things. Cheap shipping companies might just do well when the energy market shifted to reflect tighter resources and increased concern for the Earth’s environment.
The answer to the every day investor is diversify and hold on. Put some money in banks, a few dollars buying pharmaceutical company stocks, something in restaurant chains, a manufacturing company or two, and maybe some Blue-chip giants, like Boeing, Ford, Johnson & Johnson or Proctor and Gamble.
How much of your money do you use chasing around for the next Apple Inc? None. Unless you work at Apple, you had no business investing in them when they were the street corner punks of the computer industry. OK, some people had a good hunch or liked the quirky company – and, yes, the scored big. They were lucky. But if you trust luck, invest in lottery tickets. In general, don’t toss your hard-earned money on luck.
Invest in time. Invest in long-term stocks and wait for the tide to rise, the tide being the general economy. If you go down, you will have a lot of company. If stocks rise, you will also have company. Then maybe take 1 percent of your capital and make a few wild bets and once you get that out of your system, leave your stodgy investments alone. That’s the way to make your grandchildren proud.