I suddenly thought of a very “DUH!” statement by one
General Manager of Operations at my previous company, Agilent, during a coffee talk many years ago.
His mantra is (drum rolls please):
“I give you all a stock tip on Agilent share- and that is – Buy Low, Sell High.”
As easy it may sound, the reality is, ‘Buy High, Sell Low’ is what occurred in the stock market.
On top of my head, here’s something to remind myself and to share with you what we should think of when we feel the urge to apply the “Buy High, Sell Low” rule.
Excerpt from Warren Buffett’s letter to Berkshire Hathaway shareholders in 1997:
If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?
Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the ‘hamburgers’ they will soon be buying.
This reaction makes no sense. Only those who will be sellers of stock market investment in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.
Excerpt from Peter Lim’s investment philosophy from BursaMethod.com
Imagine you are going to a supermarket and want to buy 2 kilos (packets) of Milo. The day before, the price is RM 30. Today, it sells for RM 35. Are you feeling happy? Then, the next day, it went up to RM 40. Do you feel it is even better and you buy more?
If you daily morning diet consists of Milo, and the supermarket is selling at a discount today, you have a choice. You can sit on your haunches and ponder whether it will be even cheaper the day after, or you can stop being silly and just load up your shopping cart.
If the price dips further the day after tomorrow, you can always buy more packets. But if you sit on your arse and miss out the sale, well, time wait for no man.
If you bought a house at RM 500k, and you want to sell it now. I offer you RM 300k today. And I say this to you – “If you don’t sell your house to me today, I am going to offer you RM 290k tomorrow.” And then tomorrow comes, I say this to you “Okay, since you are still so stubborn to not sell your house at RM 290k today, I am going to offer you only RM 280k tomorrow. You better sell me your house today since it is in a down trend offer price!”
This makes no sense too because knowing the value of your property, such taunt will be dismissed because you can fetch a price higher than RM 500k.
What happens here is that because stocks is something intangible (albeit it is the business entity of a company), we find it hard to apply the same concept, unlike for tangible stuff like hamburgers, Milo and real estate property. The intangible trait of stocks makes us confused between the price (what we pay) and its value (what we actually get).
When it comes to value investing, understanding the business nature of a company and reading its financial statement is the only way to discover its intrinsic value. And boy, this is no walk in the park – it is real hard work.
Now, when is the last time you really read the financial statement of a company stocks which you are invested in?