Example Of Multiple Buy Low Sell Highs

As far as our novice eyes can tell, this transaction chart, found at thewallstreetbully, demonstrates the concept we posted last week of buying low and selling high within a single investment over time.

This is not the secret to investing superstar success. It’s just an example of successful application of the principle.

Shares were purchased after dip, then sold after steeper dips that followed a crest. Then, when shares began to rebound, they were repurchased.

Of course, he coulda just held all the way and not incurred any transaction costs…

PREVIOUSLY: Thinking Differently About “Buy Low, Sell High”

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  1. oneTee says:

    so…what’s the outcome?

  2. Myron says:

    I have no idea what that chart is showing. The link provides no illumination. Is this a test?

    I’m guessing this is from a quant who’s found a way to beat the market. Good for him. The world should now beat a path to his door. Notify the financial industry it can now retire.

  3. Malethos says:

    This method can certianly make money, and provided that one is maintianing a careful watch on the asset in question it is a valid strategy.

    The major factor here is this. What percentage of your invested funds are the transaction fees eating. This means that the more you have to invest the more efficient( in general) this strategy will be (as the reansaction fees tend to be a smaller percentage for larger investments).

    The other thing that can bite you with this is capital gains — if you are holding cash from your latest sell, you will have the choice of investing it in annother asset(call it Asset B)( which may impact its availability when Asset A is once again displaying a buy signal, or taking a tax hit at the short term rates to make sure its available when the turnaround comes.

    That said this is an excelent strategy for the canny investor — provided that they keep their eyes on the market and the taxman.

  4. urban_ninjya says:

    In my experience everything look simple once you see the chart. But hardly is since you need several days after the indicator point to see that to see the actual trend. Then there’s earnings announcements that are every quarter. And how the company fundlementally does at those points already trumps anything the technicals in the stock graph have to say about the stocks. So what does that really leave you? About 2 months out of each quarter you can effectively trade. Out of that, you want to avoid the dates the big analyst firms gives their reviews on that stock, and out of those days you want to avoid earnings announcements of their closest competitors as well. And if you can’t buy large enough numbers, that $8 commission to buy and sell both ways seems a little steep to overcome profitably.

  5. Sherryness says:

    To my novice-but-learning eyes, this shows a good example of the wisdom of trading during a bull market. With good examples of sell/buy/sell over the bull’s most clearly drawn horns. Of course I could be mistaken – I’ve never traded – just read about it.

  6. Notsewfast says:

    @urban_ninjya:

    You’re totally right. It is very easy to claim that a strategy is a success in hindsight, the whole concept of “buying when it dips” is flawed and the results here are either one of several, or a very lucky quant who is claiming that this anomoly is a “proof of concept”. The fact is that quant analysis and trading can work sometimes, but by and large decisions must be based on quantitative and qualitative data.

  7. not_seth_brundle says:

    Okay, now show us the chart of someone who tried to time the market and didn’t do so well.

  8. anatak says:

    “Proof of Concept” is a great title. Its a great concept. Did it really need to be “proven”? Did anyone not get “buy low, sell high, buy lower, sell higher”?

    Anyways, its a great concept. Terrible investment plan. Someone’s been watching too much Jim Cramer.

  9. Nytmare says:

    How about a nice game of chess?

  10. Ben Popken says:

    Wow, be careful when exploring the world of investing. There’s a lot of sharks out there.

  11. storm says:

    More technical analysis voodoo.

    The problem here is that you can’t know in advance the depth of the dips or peaks. If people could know that, investing wouldn’t be hard.

  12. okcomputador says:

    I’m surprised no one on here understands what this represents (I don’t say this to be snarky, rather usually impressed with the overall level of general comprehension on this site)

    This is a simple chart of a moving average plotted (can’t tell the period… prob 30-90 day) against the underlying security’s movement… this is the most basic level of technical analysis (a theory/model that many traders subscribe to – one might say it is a momentum driven self-fulfilling prophecy) where the intersection of the moving average and the actual prices represent buying and selling points.

    That said, if technical analysis always held true, then no one would make or lose a lot of money. Other elements of technical analysis include support and resistance points at which the price should bounce up or down.

  13. Ben Popken says:

    No one is saying this is the secret to investing superstar success. It’s just an example of successful application of the principle.

  14. swalve says:

    Read the fucking article…

  15. Notsewfast says:

    @okcomputador:

    What gave you the impression that no one here understood the chart?

    A common example used by quants and this data tor prove their prowess is IBM, which when using this method seems to track very well and yeild great results. However when applied to the majority of stocks, you come out even with, or worse than the market. The concept is the same, that the data’s “proof of concept” is derived from one succesful attempt, not an aggregate result.

    @Ben Popken:
    No worries, I think the tone about this is just to warn against this type of investing. Not sure if you are aware, but this type of investing (quantitative of “quant”) is hotly contested and contraversial in the investment world. The key is to realize that while past performance can give you an idea of what to expect in the future, it’s not rational to assume that the average return derived from back-testing will be matched in the future.

    The unfortunate thing is that the markets are subject to large amounts of randomness and a very common mistake is to attribute a lucky pick to skill. Often people who make large gains in a short period do say by taking tremendous risk, and in the long run, these types of invesors will lose their hats.

  16. Triteon says:

    @storm: I disagree. You can make the same logical decisions on investing the same way a young Warren Buffett did. It’s more a question of taking the time to do so. That’s where various fees come in– you paying someone to do something you are either not able or willing to invest the time to do.
    To me, what the chart truly illustrates is the value of buy-and-hold (though this example is a bit too short-term.) Too many people want to make a quick killing in the market– which is fine– though the cliched-yet-proven best-strategy is to buy for long-haul investing.

  17. ironchef says:

    that strategy would have LOST you money if you had bought stocks like IOM, BKHM, Enron, CMGI, ZD, PETS.com, MarchFirst (I can go on and on).

  18. This is a TERRIBLE example!

    You don’t know the quantities of shares involved in any of the trades, so the graph is next to useless. That said, for the majority, he’s behind the market when either buying or selling. There’s no point in trying to “buy low and sell high” in a given stock unless you can beat the market. Also, the graph indicates a swing of less than 100%, and if you’re going to use an aggressive buy low, sell high strategy, you’ll want to see more volatility than that.

    As the blog post said, this person would have been better off just holding the stock after the first or second buy. Nothing will beat doing your research into a company before investing, and then holding based on that research … not over the long run, anyway.

  19. storm says:

    @Triteon:

    If you’re saying you believe in buy and hold, and Buffettism in general, then we’re not in disagreement.

    What I pointed out, apparently not in sufficient time to raise the level of discourse high enough for okcomputador’s tastes, was that this is “more technical analysis voodoo.”

    The two are not the same. Nothing in any of the books on Buffett I’ve read indicates that he trades based on chartism.

    For the non-professional investor, an age and goal appropriate ETF portfolio held for the appropriate term is the best bet.

  20. Malethos says:

    Looking at the charting its a pretty weak proof of concept as well.

    Working with optomistic numbers( i.e. best possible price on indicated transaction dates) and 100% buy/sell orders it looks like the investor made a gain of ~50% on his initial investment with this plan.

    This beats putting it all in and forgetting about it by ~10% if you buy at the first point, but looses to buying and holding at the second buy point by about 3%

  21. wonderlic says:

    I agree with the post’s comment about just holding the stock. To my eyes the person who did this was out of the stock for about a year and a half over a 6.5 year period. Assuming he was moving the same price adjusted amount in and out the whole time then he would have been better off sitting on the stock and avoiding the trasnaction fees, no doubt.

    That said, a couple of things – 1, if you’re using this as a profit producing technique and your capital as a money generator then there may be some use to doing this. That said, again, looking at the chart it looks like the stock gained about 37% from the inital investment. Over a 6 year period that’s about 6.1% per annum, average. I don’t have it in front of me, but you may be better off just buying an index fun, or carefully shopping for a mutual fund.

    I have seen twchniques LIKE this work spectacularly – moving into a basket of stocks at a “low” and then out to T-bills at a “high” and then back in at a low and so forth and so on. The caveat is, I’ve seen that work when the person has expert advice. If you’re not paying for the information that you’re using to make these decisions then you’re trading on old info. The houses like Goldman and Merril are way ahead of you. That’s the ultimate problem of the average investor trying to time anything.

  22. Observer2121 says:

    It really doesn’t matter how many shares are being traded. All he is doing is buying at the point the stock prices crosses above its 50 day moving average and selling when the stock price falls below its 50 day moving average. As long as he sells and buys the same number of shares in each buy-sell cycle I see no reason why the actual number of shares should matter at all. This method is far better than simply buying and holding.

  23. yahonza says:

    SO, in this particular case, the guy made a series of lucky guesses about when the stock was “high” and “low.”

    Yes, lucky guesses, I don’t care what method he is using to make the guesses, he’s not Nostradamus, and sooner or later his luck will run out.

    There is no way to know that a stock is “low” so its time to buy….it could just as easily keep going down as go up. Thinking otherwise is delusional.

    Investing in a broad indexed mutual fund is a lot smarter in the long run.

  24. zolielo says:

    The trick is an ARCH model with very good data and a proprietary twist. :)

  25. lemur says:

    Popken says:

    Of course, he coulda just held all the way and not incurred any transaction costs…

    Bingo! How does this chart show that buying and selling is any better than buying and holding?

  26. miborovsky says:

    You can’t beat the market…

  27. gbeck says:

    Buy low, sell high is great in theory. The problem is that there’s no way to know when the stock is low or high. You may buy “low” when a stock dips, only to find that you bought on the cusp of a prolonged, multi-year decline. Or you may sell “high” on an uptick and miss out on years of growth. Unless you have access to information that the market does not, your best bet is to play the averages by buying and holding a diverse portfolio of stocks or a diverse mutual fund. Value will dip and spike, but if you are insensitive to these variations and hold on for the long term you will more than likely see a comfortable return.

  28. raisincain says:

    It appears that he’s buying and selling everytime it crosses the line, but he conveniently doesn’t show a trade three times that it crossed the line and wouldn’t have worked out. I find it highly suspect to pick a chart, tell people you bought it here, here and here and sold it here, here and here. As soon as real money is on the line it’s not quite as easy to pull the trigger as it is when it’s paper trading or even worse, showing what “I would have done” after the fact.

    Pretty weak argument in my book and I’ve traded stock and options professionally for over a decade. It’s not that easy.

  29. Observer2121 says:

    This method is better than buying and holding because you are taking advantage of the dips in the stock. Basically you are taking advantage of the majority of the upward movement in the stock price which occurs when the price is above its 50 day moving average. During the other times the money could be put to work elsewhere. Transaction fees these days are really insignificant, $10 – $15, if that is affecting your results then maybe you shouldn’t be trading. Plus buying and holding is a lot riskier, what if the stock falls and keeps falling? This trader would have exited once the stock fell below the line however a holder would experience all the downward pain. If and when the stock does recover this method will get you in once the price crosses back above the 50 day average. There is no luck involved, its just a discipline.

  30. gbramme says:

    The only reason the chart makes this look like a successful strategy is the positioning of the red and blue arrows. Look at the actual price level at each transaction and each “sell-buy” pair *lost* money, even without considering transaction costs.

  31. dalejo says:

    @gbramme : I think you need to take another look at the chart because you are wrong. There are even dates to help you out. The most recent buy does not have a sell shown as well.

    Technical analysis is just as valid as any other other method out there. There are plenty of people who make money doing just as there are people who do fundamentals and value. Everyone is put to the test in a bear market (maybe except the people who are willing to short).

  32. jbohanon says:

    I think the principle example of buy-low sell-high is investing in cattle futures back in the late 70’s. Seemed to work for Hillary Clinton.