• Treavor Dodsworth

#66 - How "Buy Low Sell High" Can Lead to Poor Investment Behavior


Everyone has heard the phrase - “Buy low and sell high.” This is a very helpful phrase - particularly if the market has a downturn. I imagine this phrase has helped many stay the course through market downturns.


A negative of this phrase is that it can cause people to hesitate from buying if the market has gone up. I want to introduce a new phrase - “Highs typically lead to more highs.”


To illustrate the concept, I want to share two articles with you:


“Even God Couldn’t Beat Dollar-Cost Averaging” by Nick Maggiulli

Nick creates a scenario where Investor 1 is all-knowing and only buys stocks at a market dip and Investor 2 just buys stocks on a routine basis every month. He does restrict either investor from moving in and out of the market. Obviously, God wouldn't have this restriction and therefore would beat Dollar-Cost Averaging but this article is fascinating nonetheless.


In his scenario, Investor 2 wins over 70% of the time and that is if you knew exactly when the market bottom would be. If you miss the market bottom by two months then the systematic disciplined monthly investor (Investor 2) wins 97% of the time. Nick makes the case that “if you attempt to build up cash and buy at the next bottom, you will likely be worse off than if you had bought every month. Why? Because while you wait for the next dip, the market is likely to keep rising and leave you behind.”


“All-Time Highs Are Usually Followed By All-Time Highs” by Ben Carlson

Ben looks at all-time highs in a stock market index from 1915-2017. He says, “The thinking is that any time stocks reach a new high it must mean that we are close to a peak that will surely bring the market crashing down. That is always a possibility, of course, but investors in stocks have to remind themselves that they will see many highs in a lifetime of investing… assuming the average investor is in the markets for 40 years, that would be almost 500 highs in a lifetime of investing in stocks.”


Obviously, I don’t know what the stock market will do. It very well could have a drawdown but the very fact that I don’t know and you don’t know means that you choose a disciplined long-term investing approach. Attempting to time the market by moving in and out of the market AND by waiting to buy simply because you "feel" there may be a market downturn is not a strategy I believe on average helps investors.

Interesting Article(s) or Video(s)

I encourage you to read through the articles linked above! The authors provide more detail about their analysis in the articles.

Thank you for reading!

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