Thinking Differently About "Buy Low, Sell High"

We’ve been reading this weekend’s New York Times mutual funds report sitting on our kitchen table a little bit at a time for breakfast and something we saw in, “Don’t Pay Tax Twice On Your Fund Gains” changed how we thought about the old adage of “Buy Low, Sell High.”

The article quotes Duncan Richardson, chief equity investment officer of the Eaton Vance financial service company as saying,

    “I’ve never seen a great investment that you won’t have another opportunity” to buy back at a lower price, after the requisite 30-day period.”

And recently we also read someone talking about how selling after rises is good because it “locks in gains.”

Now, the following is probably going to be obvious to some of you, but hey, if we didn’t know it, maybe some other investment novices will benefit too. Before, we had sorta thought about buy-low-sell-high as like you want to get in on the ground floor of a stock, sell it after it gets to the top, and then you’re out and onto the next one.

But really, Richardson is saying you can buy low, sell high, then buy low again, if the investment is good and your timeline is long, sell high again, and perhaps again and again.

Then again, we barely have any idea what we’re talking about here, so please correct us if either we or are misinformed.

Of course, you don’t want to do this too much because the transaction costs will eat into potential profits, and you can drive yourself crazy with “over-steering.” We’re still believers in a buy-and-hold strategy, but the revised buy-low-sell-high concept is something we’ll be keeping in consideration.

Don’t Pay Tax Twice on Your Fund Gains [New York Times]

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  1. Scuba Steve says:

    Well as long as you still believe in the “Buy and Hold” philosophy it all works out.

  2. artki says:

    > The article quotes Duncan Richardson, chief equity investment officer of the Eaton Vance financial service company as saying,
    “I’ve never seen a great investment that you won’t have another opportunity” to buy back at a lower price, after the requisite 30-day period.”

    Sounds like a good reason to avoid investing in any equity funds from Eaton Vance.

  3. fredmertz says:

    Sometimes stocks keep running and running and you don’t get another chance to buy lower. Look at Apple over the past year — you would have had to be pretty perfect in timing sales to buy back lower 31 days later. Looks easy in hindsight, but that was one you’re better off hanging on to. A saying that many good traders believe is, “Cut your dogs and let your winners run.”

  4. Gasface says:

    I’m no stock expert, but I have been very fortunate over the past few years with my investments. One thing to keep in mind is that if you sell your stock in under one year you are responsible for short-term capital gains taxation, which is at a far high level than holding a stock long (longer than one year).

    Here’s the bottom line:

    If you’re in the 15% tax bracket:

    * Capital gains on assets held for a year or less are taxed at your ordinary income tax rate (in this case 15%).
    * Capital gains on assets held for more than a year are taxed at a reduced tax rate of 10%.

    If your ordinary income tax bracket is greater than 15%:

    * Capital gains on assets held for a year or less are taxed at your ordinary income tax rate (anywhere from 28% to 39.6%, depending on your specific ordinary tax rate).
    * Capital gains on assets held for more than a year are taxed at a reduced tax rate of 20%.

  5. JohnMc says:

    What Vance is somewhat implying is there are cyclic opportunities out there that one could take advantage of. I’ll give you an example:

    Many years ago I worked for what was then GTE, the ‘other’ telco. Interesting thing. They had a stock purchase plan that you could buy the stock at 15% less than retail with no brokerage fees. That offer occured in November. The company typically did stock buybacks if any around February. So there was always a run up in the price around the end of January.

    So the smart money would buy the maxiumum number of shares allowed. Borrow the money as an investment expense and hold till January of the following year then sell before the priced dropped. It was like legally printing money.

    Now there are still stocks like that. They have some natural cycles due to internal treasury manipulations. Find them and the cycle and you can improve upon your return on your holdings in your portfolio.

  6. Doc Benway says:

    I can honestly say that this strategy has worked for me for the past 2 plus years. I am averaging about 25% return on my money. Not hedge fund returns but they beat the snot out of what a mutual fund offers. My secret – I found a few companies that I got to know well and trade them and trade them often. I also sell covered calls on the stock. Although it may limit my upside it gives me an additional income stream for my money.

    I disagree that you have to worry about the tax charge. Even at the higher tax bracket you are getting to keep 60% of money you never had.

  7. wobudong says:

    I don’t know anything about the above commenters. They’re probably terrific guys and wonderful investors sharing their methods so you, too, can make 25% on your investments — just like they do!
    On the other hand, maybe you’re just normal and have enough common sense not to rush into anything without long thought and investigation.
    If you want advice or opinions on investing, take a look at the discussion groups on morningstar.com (with which I have nothing to do).
    But if you’re simply greedy, you’re going to get very very rich in a very very short time. How do I know? I can look into the future and pick stocks that only rise in value after you buy them.

  8. Gasface says:

    One thing to keep in mind is that every time you take your money out of the market you are taxed and pay fees. These extra charges don’t seem to add up when you’re making money, but keep in mind, you don’t always beat the market. Warren Buffett didn’t become filthy rich day-trading, he became rich by investing in under-valued companies that had strong fundamentals.

    Dividends are always nice too. If you have an IRA account a nice play is to put a couple thousand into a fundamentally strong stock that pays revested dividends. Over the course of your lifetime the stock price will rise and the dividends will increase your position modestly.

  9. raisincain says:

    In hindsight low and high are obvious, but when you are holding the position how do you know whether this is low or high? If it was obvious on the date of purchase that it was low, then no one would sell it to you. But the simple fact that someone, probably someone that knows more about it than you like a professional trader, specialist or market maker, has sold it to you means that he thinks this is a good spot to sell it. That’s how a market works.

    If anyone looks at a stock chart and tells you that you should have “bought here at the bottom and sold it here at the top, and simply repeat” they are selling snake oil.

  10. Isn’t it amazing how companies that charge fees when their clients buy and sell always advise their clients to do a lot of buying and selling?

  11. shoegazer says:

    If profiting from volatility is your game (which is what the Eaton Vance guy seems to be implying), then a spread betting account will provide much better returns in the short term, because you can leverage a small amount (say $1 per point) into very large gains very quickly.

    Unfortunately it’s classed as “gambling” in the US so my advice is in fact worthless… for US residents anyway.

  12. Doc Benway says:

    @Daniel Rutter: The fees your brokerage charges you are tax deductible. And $10 in and $10 out is not too bad.

  13. mrrbob says:

    Al of this just depend on how closely you want to follow your investments. If you are into day trading and get to know the stock personality then fine but go in easy until you know what the hell you are doing. Use the tools available to you to chart the stocks performance over time. I like playing with this stuff so I play the penny stocks. Small potatoes you say? Then you don’t know anything about stocks. Find me a stock that will gain or lose 30 to 50% of its value. Oh yes that would be a dream right as you could really buy low and sell high and make good. Well bunky it works that way in penny stocks every day. I target stocks priced under .010 in value exactly because they will gain or lose 2 to 5 cents in value at the drop of a hat. Dump in 500.00 and 2 weeks later it goes up .003 and I make an easy 300.00 bucks. what a joke you say as who wants to bother with 300.00? I do as I am holding up to 50 stocks exactly like that and I buy and sell them every day. I have made as much as 2k in one day selling high and buying low. Yes I am a small small player but go ahead and try to tell me that averaging an easy 300 to 500+ a day is a waist of time… you are joking right? I call this little game racing the dogs. My dog stocks are making me a damn good living/retirement and I have a blast. I got all my friends and family doing it and they treat me like some kind of stock god. This is some real fun and easy money. Some of you should check it out but go in easy until you know you have got it figured and then take about 10k and start buying stocks in blocks of 300 to 500.00. They will jump all over the place and you can profit with ease at an easy 30% plus by racing your dogs and having winners every day.