Whilst we all would love to buy a stock before it rallies and sell before it crashes, in reality, sometimes we do buy a stock after it has had a decent run and sell when it has corrected. It does seem to go against the Buy Low and Sell High doctrine so popularised by Warren Buffett’s “Be fearful when others are greedy and greedy when others are fearful” quote.
This article explains why it may not be in contravention of Buffett’s doctrine better than we ever could. In summary, the author says popular understanding of the doctrine is considering the highs and lows in relation to the share price’s own history or future, whereas what Buffett meant by high and low is in relation to its fair value. And that’s what makes what’s seemingly easy, incredibly hard. Establishing a fair value of a stock involves carefully considered judgements about the unknowable future based on fundamental understanding of the business with a reasonable degree of probability, unlike looking at stock price highs and lows, which in any case is known only in hindsight.
The author illustrates this using Intel’s fairly volatile stock price trajectory over the years and why it is nonsensical to be looking at price charts and follow the Buy Low, Sell High rule.
“When most people talk about buying low and selling high, they’re talking about market timing or identifying share price trajectory. In contrast, Buffett is referring to buying assets when they are undervalued, and selling them when they are overvalued. In other words, buying a dollar for 50 cents and selling for $1.50.
Notice the underlying implication of this. It means that Buffett isn’t really trying to get the best price from anything — i.e. timing ‘tops’ and ‘bottoms’. Instead, he is trying to get a good enough price — undervalued when buying, overvalued when selling. He is not trying to be No. 1 by timing ‘tops’ and ‘bottoms’ — he is simply trying to be above-average.
A similar sentiment is echoed in Benjamin Graham’s notion of an “adequate return” in his famous quote below:
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return.” — Benjamin Graham
Thus when Buffett talks about ‘buying low and selling high’, his context is not share price trajectory, but rather the stock’s fair value. He really couldn’t care less about which particular point on the squiggly line he buys in or sells out of. This is markedly different from how most people interpret ‘Buy Low, Sell High’.
A subsequent implication of this interpretation of ‘Buy Low, Sell High’ is that Buffett isn’t really trying to compete with others whenever he makes an investment decision. Of course he’s the Oracle of Omaha — but he’s not really trying to be the Oracle of Omaha, nor does he care about defending his title. What he’s entirely focused on is buying 50 cents on the dollar, irrespective of what others think of him. And he simply trusts that by following the process (i.e. value investing), he will eventually become No. 1 someday.
Again, and it bears repeating, this means that ‘Buy Low, Sell High’ doesn’t refer to the market timing of share price trajectory. Rather, it is used in the context of buying undervalued assets and selling overvalued assets. The interpretation of the same quote could not be any more different.”
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
