Should you buy shares when they’re low? Why am I even asking such an obvious question, when the ‘buy low, sell high’ idea is at the very core of investing in shares?
The problem is – it doesn’t always work out like that. What if you’d seen the big dip in Thomas Cook shares in the summer of 2016, when it was down to less than 60p, and thought, “Should I buy those shares when they’re low?” If you’d been canny enough to get in at that point, you could have watched the price climb back up again and you would have more than doubled your money in a little over two years.
And if you’d timed the peak right and sold in May 2018, you would have managed a perfect ‘buy low, sell high’. But look what happened next.
By September, the price of Thomas Cook shares had dropped back below 60p again, just where it was when you started. And if you’d tried a repeat of your previous success and bought back in, you’d have lost around 90% of your money. You know what you would have actually achieved this time? ‘Buy high, sell low’, that’s what, and a surprising number of private investors end up doing it every day.
There are many other examples, because the big mistake that many people make when they go for ‘buy low, sell high’ is that they do it without understanding what ‘low’ means. It’s only a tiny word, but it’s probably one of the most dangerous in investing.
I’ll tell you what low doesn’t mean. It doesn’t mean fallen a lot. It doesn’t mean down where was last time it fell. It doesn’t mean below some other point on the chart, or on a different chart, or below any other specific share price. Whether a share price is high or low, in terms of whether you should buy it or sell it, simply cannot be determined from the price alone.
When a share price has fallen, or if it has risen, you need to investigate and understand the reasons for the movement. It was pretty clear that Thomas Cook, for example, was facing serious difficulties that risked the complete collapse of the company. And a fall of 90% in response to events that meant it could be worth 100% less? That’s just not a low share price to me.
But some shares fall in price and genuinely do become low compared to their real long-term potential. As an example, I think that’s true of Saga at the moment – though that’s not without risk, and I could turn out to be wrong.
I think the best way to find shares that are genuinely priced too low is to forget about chasing falling shares altogether – it’s just too risky to form the basis of my portfolio.
Instead, I try to follow Warren Buffet’s approach. I’m not looking for shares that are in trouble and have fallen so far they’re a steal. I’m looking for great companies that I think will provide me with steady rewards over decades. If I can find such companies at fair prices, then that’s what I think of as the best way to buy low.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.