Buy Low, Sell High - So Why Don't You?

Stock prices get low for a reason - either a failing business or a market correction. Buying a falling stock by betting that the company will turn around is a losing strategy. More often than not you will end up buying low and selling even lower - just check out the chart of Ford from 1998-2008. A market correction will drag down all stocks, even the good ones. So why don't you buy then? Because for stocks to decline, say, 20 percent, the crowd must expect a decline of 40 percent, otherwise it won't sell because nobody knowingly sells at the bottom. When the bottom is reached, pessimism is so widespread that people are afraid to touch stocks. The end result: you don't buy low, not even the best of the best stocks.

At some point stocks stop declining and turn back up, usually against the crowd's expectations of more weakness and despite the prevailing gloom and doom. They are still not too high to buy but you don't because you don't trust the move, still expecting the worst.

At some point when the advance is well underway, you begin to wonder whether you should in fact be buying, and to blame yourself for missing the bottom that is now clearly visible to all. Eventually the fear of missing out on a rally that seemingly everyone but you is profiting from takes over and you decide to take the plunge.

And that's where you finally remember to "buy low, sell high." You start looking for "undervalued" stocks that have not "yet" participated in the rally so that you feel as if you've not missed much. But what you are actually doing is buying laggards that can't go up even in a strong market.

The higher the market goes, the bolder your moves become. After all, the sky is the limit, according to the gurus and talking heads who are now peddling unbridled optimism to the enthusiastic crowd.

Then - bam! - the market drops, taking you down with it. Sell? Not you. You just got going. Besides, stocks are still undervalued, according to the pundits, so they are not yet "high." And you ride the wave down, maybe even buying more of "even more undervalued" stocks.

So there you have it: buy high, sell low. Sound familiar?