Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now


You can switch off notifications anytime using browser settings.

Portfolio

Loading...
Select Portfolio and Asset Combination for Display on Market Band
Select Portfolio
Select Asset Class
Show More
Download ET MARKETS APP

Get ET Markets in your own language

DOWNLOAD THE APP NOW

+91

CHOOSE LANGUAGE

ENG

  • ENG - English
  • HIN - हिन्दी
  • GUJ - ગુજરાતી
  • MAR - मराठी
  • BEN - বাংলা
  • KAN - ಕನ್ನಡ
  • ORI - ଓଡିଆ
  • TEL - తెలుగు
  • TAM - தமிழ்
Drag according to your convenience
ET NOW RADIO
ET NOW
TIMES NOW

Why buy low, sell high is a dicey approach to making money in stock market

Don’t time the market. Invest according to the quality of an investment and whether it is fairly priced, based on its fundamentals.

ET CONTRIBUTORS|
Updated: Jan 07, 2019, 10.55 AM IST
0Comments
Getty Images
buy-sell-getty
The right thing to do is to never buy according to where you (or others) believe the market is heading.
By Dhirendra Kumar

This is said to have been an old Wall Street joke. The newcomer asks a grizzled veteran, "How do I make money on the stock market?" The old master replies, "Why, that’s the simplest thing: buy low, sell high." So the young man asks, "Yes, but how do I do that?" The veteran replies: "That’s very difficult. It takes a lifetime to learn."

Not a great joke, but it rings true. It seems almost self-evident that the interpretation of ‘buy low, sell high’ is to buy when the markets have fallen, as they have over the last few months. Investors and advisers are universally of the opinion that a ‘correction’ (a foolish euphemism) is the right time to buy.

As proof, one can look back and do all kinds of calculations showing that investors who bought when the markets had dropped made more money than those who did so when the markets were high. Such calculations, of course, are a prime example of 20/20 hindsight.

When the ‘correction’ happens and the market becomes correct (I’m extending the euphemism), how do you know that it’s not going to become even more correct? And, then, what happens if it becomes extremely correct? How long will you wait for it to become incorrect again? The correct answers to all these questions are crystal clear when you are interpreting past events, but it’s little more than guesswork, when you are trying to look into the future.

However, the real reason why this approach is less than ideal is different. The moment we say that we must invest because the markets are dipping, we are effectively telling ourselves that when the markets are not rising, we should not invest. Perhaps we should even sell our investments and then wait for the decline.

That seems like a logical and sensible thing to do. Buy stocks or invest in equity mutual funds when markets fall. And if it’s a good idea to buy when the markets are diving low, then the corollary—to sell when the markets are zooming up—must also hold true. Both steps seem to be exactly what will lead to higher returns, right? Superficially, it all seems to make sense.

Actually, it does not. The right thing to do is to never buy according to where you (or others) believe the market is heading. You need to invest according to the quality of an investment, and whether it is fairly priced according to its intrinsic characteristics, and not by guessing either that investment’s or the market’s future momentum. More than a century of experience has shown that trying to time the market is no better than acting randomly. This is even truer in the kind of knee jerk volatility that has become common in recent years.

Professional punters may do whatever they want to, but for mutual fund investors, the path is absolutely clear. They should choose three or four equity funds with good long-term track records and invest steadily through SIPs, and not bother with market crashes. The whole point of investing in a mutual fund, either through an SIP or otherwise, is to continue doing so in bad times. You do not know anything about the future. You do not know when the market will correct and when it will incorrect. You do not know how suddenly any of that could happen. All that you know, with a high degree of confidence, is that if sustained over years, equity investments will bring great returns, coupled with great volatility.

The only way to use this combination of great returns and great volatility is to keep investing continuously, regularly and steadily, without interruption.

(The writer is CEO, Value Research)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
0Comments

Also Read

Stock market hitting new highs: 3 value stocks to invest in now

Hong Kong beats Japan as world's third-largest stock market

China stock market turns an outlier as foreign capital rushes in

Indian stock market keeps raising the bar as bulls party

Has the stock market established a bottom?

Comments
Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Share Market & More.

Other usefull Links


Follow us on


Download et app


Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service