Why Buying Low Doesn’t Always Lead to Success
When I was first starting out in the investment business, I heard many people say they wanted to buy stock in a company when it was cheap, with the idea they would make big money when the price of its shares went up.
It seems everyone has a story of someone they know who did this - buying stock when no one else wanted to buy it, watching it go up and making a lot of money off it.
While those kinds of stories make for great water-cooler talk, the reality is quite different.
Over my years in this business, I’ve seen many more examples of when people bought depressed stocks only to watch them get more depressed. It’s important to remember that, when you are buying stock, you are also buying part ownership in a company. Sometimes people lose sight of that, or are simply unaware, when they do business in the stock market.
If I asked someone to go buy a private business, they would generally look for one that was doing well - adding new customers, becoming more profitable, being a good steward in the community, etc. No one would expect to buy these types of business cheaply. Their owners would demand a high price to sell the successful business, and for good reason.
Most people would not look for one that had declining profits or was losing customers just because they could buy the business for less money. Yet many people do this when they invest in stocks.
Many of the best-performing stocks I have purchased through the years have been ones that were trading at or near their all-time high when I bought them. When a stock is trading this high, there are not a lot of pre-disposed sellers. Most everyone who owns it has a profit and is happy with it, so the stock is less likely to hit selling pressure. If a stock falls from, say, $50 a share to $10 a share, there will be people who bought it at $40 on the way down who are waiting to get their money back. There will also be people who bought it at $30 who are waiting to sell when it gets back to $30 again. Therefore, the stock encounters a lot of selling pressure as it tries to rebound.
Anytime you are investing in a business, there’s risk involved. While it’s often tempting to try to buy something in the stock market at what seems like a “sale price” - that’s not often the best way to go.
Most of the time, if I am going to take a risk, I would rather take the risk of buying a company that’s doing well and has the potential to keep doing well than hope that a company that’s not doing well changes its course in the future.
David M Jackson, CFP®, C(k)P™
Managing Partner, SSCG
Senior Financial Advisor, RJFS
Past performance is not indicative of future results. The information provided is for informational purposes only and is not a solicitation to buy or sell any security. Any opinions are those of David Jackson and not necessarily those of RJFS or Raymond James.
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