By Mike Sorrentino, CFA, Chief Strategist, Aviance Capital Management. Reprinted by permission.
Buy Low, Sell High
The adage to “buy low and sell high” sounds like an obvious path to building a large nest egg. The premise is as simple as it gets. All that is required is to buy stocks cheap, sell them when they become expensive, and repeat until rich.
The problem is that executing such a strategy is extremely difficult to pull off on a consistent basis. Knowing when a stock is cheap or expensive requires expert-level skills in accounting, finance, and valuation techniques along with a thorough understanding of an investment’s competitive landscape.
The best stock pickers spend years in school and cut their teeth on far more losers than winners as they fine tune their analytical processes. They then compete with other stock pickers armed with a similar toolkit, so they must also have access to superior information or see something that their competition is missing to profit over the long run.
Therefore, I find this proverbial advice to be useless because of the difficulty in implementation, but that does not mean that investors should wing it or avoid stock ownership altogether. In fact, the following chart highlights an investment strategy that any investor can execute.
The blue region shows the return for an “opportunistic” investor who invested $10,000 into the S&P 500 at the start of 1977 and added $2,000 every time the market dropped 8% or more in a month over a 40-year period. Such a strategy took a total investment of $38,000 to over $1.1 million.
The orange region indicates the return from a strategy where an “apprehensive” investor sold $2,000 each time the market dropped 8% or more in a month. This strategy returned just over $278,000 over the period. [Read more…]