Buy High Sell Low, not Buy low Sell High

We often hear this nails-scratching-on-blackboard phrase "Buy low Sell high" until our eyes roll and our skin crawling with goosebumps. There's truth in it, except that like all aphorism, it's not as simple as it is. Let's deconstruct that phrase.


Buy low sell high consists of two parts. Firstly, you have to buy at a low and then you have to sell at a high. But unfortunately, the aphorism didn't really say what we're buying at a low. It's implicitly taken to mean buying at a low price and selling at a high price, but I think it's not right. Sometimes buying at $2 might not be better than buying at $2.50, especially when taking into account the risk of dropping even lower. It's better to bottom fish when the mud had settled and the waters become clearer; the chances of fishing a stone that breaks your line is lower. But clarity comes at a higher price, so if we have to follow another aphorism "Do not lose money", then it will make better sense to buy at a higher price rather than hope than the stock will make a V shape recovery by buying at a lower price.


The more correct 'thing' we're buying should be value. Hence it's more correct to say Buy High (in value) and Sell Low (in value), rather than the more risky proposition of Buy Low (in price) and Sell High (in price). Value means different thing to different people. If you're a trader observing a counter moving uptrend, buying at high value means the price touching the lower boundary of the envelope and then selling at the upper boundary of the envelope. If you're an investor, buying at a high value could mean buying when the price went below the intrinsic value of the company and selling when it's above. But do take note that regardless of what type of market participant you are, the price is never the thing we're focusing on. It's always about what the price means with reference to something else.


Since the aphorism consists of two parts, can we also reverse the order? Sell high (in price) and buy low (in price)? Effectively that's what shorting means. You sell off something and then buy back again at a lower price to make your profits. Again, this runs into trouble because basing your decision on price alone is hoping that the high price alone will catalyze the precipitous fall thereafter. No, it should be Sell Low (in value) and Buy High (in value).


By itself, this is quite an un-actionable advice. Without telling people how to determine value, it's impossible to follow this advice, hence it's not actionable. But to tell people how to determine the value, regardless of the 'value' in question here being a trading value or investing value, it will take more than 4 words. Maybe not even 4 books have the breadth and length to begin discussing it fully.


And that's the real reason why I love aphorism. If you know it, you'll appreciate the beauty and simplicity of all the mountains of knowledge condensed into a short sentence with a nice sound bite. If not, you'll understand it after you've made a mistake following it. Either way, you're going to take home something.

If you're interested in aphorisms, may I recommend a very good one by Nassim Nicholas Taleb titled "The Bed of Procrustes". It's a very easy read, but as with every such aphorism, you'll have tons of things to think about. I think of this book as an aperitif; something to whet your appetite with promises of more things to think about. Also works great if you're a blogger and need materials to write about HAHA