A Financial Planner on the Truth Behind 'Buy Low, Sell High'

An investor's finger traces a graph of up-and-down trading prices.

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In most social circles, I’m just Debbie — aunt, sister or friend.

Professionally, however, I’m Deborah W. Ellis, a Certified Financial Planner and investment adviser for high-net-worth clients. I’ve been investing in the U.S. stock markets since I was in my 20s. My father encouraged me to save half of everything I earned. When I started doing that, my aunt helped me open a brokerage account and taught me about investing in the stock market.

Whenever I’m at a party, usually shortly after the cocktails are served, someone will discover what I do, and inevitably, they’ll ask for an investing tip or advice on what I think the next hot stock will be. Especially with today’s wild volatility, even I would require a crystal ball to know which company will skyrocket in value tomorrow, so I simply answer, “Buy low, sell high.”

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That sounds easy enough. But is it?

Unfortunately, not.

Context matters

When it comes to executing the advice of buying low and selling high, many factors must be considered.

Buying low, for example, is a completely relative term. What does “low” mean? What does “high” mean, for that matter? When looking at the price of a stock, it’s only low or high in relation to something else.

Here’s an example: Let’s say a company went public in 1999. At its initial public offering, it was $12 a share. Twenty-five years later, the price per share has risen to over $800. That’s pretty high compared to its initial offering. That said, many people will consider $800 per share low enough to buy when compared to other stocks.

As you can see, what is considered low and what is considered high depend on the context and scenario at play. Common technical analyses developed to help come to a determination include:

Price to earnings
Price to sales
Price to book

While each of these comparisons provides a framework from which to start, the ratios themselves can be measured in several different ways, meaning the numbers can be viewed and interpreted from multiple perspectives. This is because a stock’s price relationship is more than just a simple single number or ratio. Many other variables come into play when evaluating a stock’s price, including:

The stock’s price relative to other similar companies
The stock’s price relative to the market as a whole
The stock’s price relative to its moving averages (technical analysis)
The mutual funds and exchange-traded funds that hold the stock
Analyst rankings

'Buy low, sell high' is not a guaranteed strategy

All this means there is no guarantee that you will be able to buy a stock at a low price and then sell it at a high price. There are just too many other variables that come into play. (We haven’t even touched on your own temperament and history with money!)

This is why a thought-out and strategic financial plan unique to you and developed in cooperation with an experienced financial adviser is so important to your investment strategy. Knowing who you are, what your goals are and why you invest in any specific company will likely lead you to much greater investing success than any hot tip provided between mouthfuls of canapés at a party.

Disclaimer

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Prior to earning her MBA and CFP and becoming an Investment Adviser Representative, Deborah W. Ellis , CFP® and president at Ellis Wealth Planning, worked in the film industry. She learned at an early age the importance of investing her money. She has been investing her own money since she started working professionally in her 20s. She has found that managing her own assets is very rewarding and profitable. She loves helping others reach their financial dreams and goals by sharing her expertise in a way that is transparent and objective. As a fee-only adviser, she is held to a fiduciary standard that requires advisers to consider only what is in their client’s best interest.

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Context matters

'Buy low, sell high' is not a guaranteed strategy

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