You probably read the title of this post and thought it is so obvious. All you do is buy when the price is low and then you sell it for higher. Despite how simple the statement seems, there is actually a lot to unpack. To successfully execute buy low and sell high you need to be able to manage your emotion and have the right mindset.
In this post, I’ll be going over the different components that help lead to the successful execution of a buy low and sell high strategy.
Disclaimer: None of what I’m talking about should be considered as financial advice. It is for entertainment and educational purpose only.
You Need to Establish the Right Mindset
Buying low and selling high is tougher than you might think. If you have been in the stock market for a while I’m sure you can point back to a time where you question why you didn’t sell or buy at a certain price. The answer to situations like that is often your emotion at the time. When the price keeps going up, greed kicks in and you don’t think the price can ever drop so you keep holding. On the other hand, when the price keeps dropping fear kicks in and you keep thinking the price can keep on dropping.
In order to act during the scenario described above, you’ll need to rewire your brain. Focus on the fundamentals of the company instead of the stock price. Embrace opportunities to buy the stock of a company with growing fundamentals and lowering price. It’s a sale and yet people run away from it — don’t do that. Similarly, when the price is flying sky-high, it’s okay to take some profits because walking away with more than what you initially have is a good thing.
Keep Your Emotion in Check
If it wasn’t clear yet, your emotion is the biggest obstacle in the stock market. As a human, we have a natural reaction of fight or flight and flight is usually the path of lowest resistance. In the stock market, choosing flight means to sell when the price is going down and buy when the price is going up. Usually, it doesn’t end well and if you have been in the markets for a while you would know exactly what I mean. Now if you don’t know, usually when you act on your emotions is when the direction goes against you.
It’s not exactly the market is against you but rather that’s how the majority of people behave. When the price drops people get fearful and eventually sell. If everyone that is fearful sells out then the ones left are buyers that don’t fear price dropping. This in turn causes the price to go up because there is a small number of people who would still be willing to sell. The same line of thinking can be applied to the price going up.
So the takeaway is you need to keep your emotion in check. Don’t act on your emotion. Instead, think logically as tough as it may be. Or looking at it another way, do the opposite of what the majority do and you’ll be well off.
Be Comfortable With Going Against the Grain
Be able to think independently and go against the crowd. There are times when going against the grain (majority) is the logical path. However, it is difficult to act because no one else is doing it. The ability to think independently about your investments is critical to your success in the long run. It doesn’t matter what others think, it is about what you think because it is your capital on the line.
It’s important to remember that just because everyone else is doing something it doesn’t mean that it is the only option. There are other options and you should explore them. It is perfectly fine after exploring other options to end up going with what everyone else is doing. The important part is you think independently about it and didn’t just mindless follow the crowd.
Big Picture Thinking
A trap many investors face is letting the short-term timeframe distract them from the long-term goal. If you believe a company can become 10x larger, why does a 10% up or down in price matter to you? A trajectory of a company doesn’t go up in a straight line. There are going to be good times and bad times. Where you need to focus on is if the company is working towards the long-term goal you see for them.
While there is no perfect formula to buy low and sell high, there are key fundamental building blocks that shape your ability to execute. Having the right mindset and keeping your emotion in check lets you act based on logic. Being able to look at the long-term, lets you look past a bad day in the market. Building a habit of independent thinking lets you reach your own conclusion, which builds your trust in the company and yourself.
Are you struggling to hold onto the companies you have chosen? If so, you should definitely check out this post about successfully carrying out a buy-and-hold strategy.
It is also important to have the right mindset when it comes to investing. To learn how important your mindset is you can check out this post on the topic.
To get in touch, follow me on Twitter, leave a comment, or send me an email at steven@brightdevelopers.com.