It is a beautiful idea if you can do it.
The truth is, no one knows what is low or high.
- In the recent severe bear market in 2007, many people who saw their stocks decimated a great deal thought they were low. They never dreamed they would go even lower.
- By the same token, once the stocks started to go up in 2009, many people said, “I wont be caught again; I won’t buy them unless they are really cheap.” Of course, they have never been at those low levels since. They never became “really cheap.”
- I have seen people sell stocks which they thought were high, based on what they had been previously, and the stocks went higher and higher. Then news became public that justified the rise, and what had seemed high previously didn’t look high any more in the light of new developments.
- The same works in reverse. Perhaps a stock seems low in relation to its dividend. It goes lower and lower. Then the dividend is passed or cut and the supposed “bargain” is no bargain at all.
Keep 2 important points in mind
At some point, stocks are genuinely “low” or “genuinely “high.” You may be successful in knowing what that point is if you keep two things in mind.
1. First, remember that stocks invariably become “undervalued” or “overvalued.”
- They overshoot their logical goals or levels
2. Next, be sure you feel you have a special reason for expecting a turn or change especially when you are trying to buy low.
- You surely don’t want to own a stock that is cheap enough – but stays cheap.
- So you must feel that you can see improvement or recovery reasonably soon ahead.
“Buy low, sell high” is one of those wonderful market fallacies or ideas which may work out well for those who can learn the ropes.
It can be a rather expensive idea if it is just applied as a generalization.
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