“Buy low, sell high.” Is this the secret to success in stock investing? It seems so, for that is how capital gains are measured.
If a stock were bought for RM1 and sold for RM2, that is an RM1 profit, or 100% in capital gains on the investment.
So, investors began to believe that timing the market is crucial to investment success.
Here are some thoughts on timing the stock market and why it is not the secret sauce to building a profitable stock portfolio in the long term.
An ironclad stock tip from heaven?
Let’s say, someone is interested in investing in a stock that has been falling in price for months.
A voice from heaven reveals that this stock will be trading at RMX.XX at a specific time tomorrow and, at that point, the price will be the lowest ever.
It will definitely go up in price after hitting that RMX.XX a share tomorrow. This revelation is exclusively given to that person and no one else has it.
So, the question is this: Is it believable and to what extent would that person act upon it?
If the answer is, ‘Yes …’
Then comes the next question. Does the individual have the money to act? If they do, here is another question: If they had RM100,000 in the bank now, would they invest it all in the stock on the following day?
If not, how much would they invest? Is RM5,000 the entire amount?
Bear in mind that the local stock market is currently in chaos with rising fear and uncertainty. So, how much should an individual invest?
The amount of money an individual invests is a reflection of how confident they are about the stock tip. Or, it could be a reflection of their level of fear and uncertainty.
When will it be sold?
So, supposedly, the individual dumps everything they have into the stock, investing RM100,000 in the stock at RMX.XX.
The next question is: “When will they sell it?” Is it after the stock has risen 10% or 100%?
What if the voice from heaven gives another tip, that the stock will rise 100% before the price starts to drop? And, after the dip there will be no more tips as to where the stock price is heading in the future.
Which means that after the drop, it could stay low or rise again.
So, what will an individual do? Sell the stock for 100% in capital gains, guaranteeing a gain of RM100,000 on their RM100,000 investment?
If the answer is yes, congratulations! The individual is now RM100,000 richer with RM200,000 in the bank.
Can this be repeated for the next stock investment?
This time, the individual is investing without tips from the voice from heaven. Can this amazing feat be repeated?
And how many times can they repeat it — 10 times, or for a lifetime with a 100% success rate? Would they quit their day job to focus on the market? Could they build a career and get rich?
So, what is being said here?
To sum it up:
1. If the stock price has been falling, most people tend to believe it will or could fall further. Nobody is going to guarantee the stock price is indefinitely at its lowest and it cannot go lower.
2. Even if the investor believes it is, do they have the money? Will they invest all of it? This is a test of one’s affordability and courage. If one doesn’t have it, the stock tip is of little use.
3. If the stock price is rising high, the investor might consider buying more as the stock is “working”.
There is no say in how high the stock could go, so the investor could base their sale price on their level of greed (how confident they are the stock market will rise further in the immediate term). Why? There is no guarantee the stock will rise indefinitely.
4. Even if an individual did manage to “buy low, sell high”, they are not likely to quit their day job as they must have full confidence they can do this with 100% accuracy full time.
5. This is why “buy low, sell high” is for most people an attempt to make money from gambling on the stock market.
It is speculation and decisions are driven by emotions such as fear and greed. This would cause many good stocks to overly depreciate in times of fear and overly appreciate in times of great confidence or greed.
What is working in the writer’s stock investments?
Instead of “buy low, sell high”, it would be helpful to start by not looking at stock prices first before investing.
Investing is a long-term activity with investors aiming to build sustainable wealth via the accumulation of high-quality assets that churn out revenue, earnings, cash flow and dividends for the long term.
It is not about a 100% capital gain in one stock, rather, it is a series of replicable investments to build a pipeline of passive income to use to pay bills or to add into the portfolio to expand the pipeline.
Rather than investing RM5,000 in an attempt to make RM10,000 all the time and risk failing again and again, add RM5,000 at a time to safely build passive income that amounts to 5+% per annum for the long term.
A dividend of RM250 is small for a start, but it is okay because once the investor gets the hang of it, they could add a lot more than RM250 in dividends in the future.
Ultimately, this is the message: Instead of trying to be a stock hero for a moment, how about trying to be more consistent in profiting from the next 10 stock investments via dividends?
This article first appeared in kclau.com
Ian Tai is the founder of Bursaking.com.my, a platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that sifts out stocks that grow profits consistently from a database of over 900+ stocks listed mainly in Malaysia.