Buy Low, Sell High Still Good Advice

By Joseph Calhoun

Two recent blog posts caught my eye. First was this one by Josh Brown, The Reformed Broker, titled The Hardest Trade On Earth Right Now. Josh reviews the negative sentiment on emerging markets and makes the case that long term investors ought to be taking a look. The second one was this one from Meb Faber, titled What Happens When You Buy Assets Down 80%? the answer to which is that you tend to make a bunch of money. The reason I highlight these two posts is because they get at the basics of investing, the old buy low, sell high thing that so many people seem to have a problem executing. It sounds so simple but for most people its like the bugaloo, it just plum evades them (to paraphrase that other Buffet, Jimmy). 

I've read more research than any man ought to when it comes to investing. I've looked at all manner of academic research, most of which is completely useless due to unrealistic assumptions about little things like transaction costs and slippage. Lots of strategies look good on paper but if the only way to make them work is to find a broker willing to work for free, well then good luck with that. To save you the years I've spent reading this stuff, I'll let you in on a little secret. There are really only two strategies that work - value and momentum. Neither is easy to implement and both require discipline but they do work when done right. Value investing is the old buy low, sell high while the momentum strategy is more like buy high and sell higher. Personally, I've always preferred the value approach because momentum always seems to be something that exists in a stock right up to the moment I process a buy order.

What Josh and Meb are pointing out is that the only way to execute the value strategy is to buy things that are out of favor. It isn't easy to buy the thing that everyone seems to hate and therein lies the real difficulty with investing - yourself. It isn't a natural thing to stand outside the crowd. Humans want to feel part of a group and being a good investor requires that you do the opposite. And as Meb's research seems to indicate, the more uncomfortable, the more outside the group, the better. That's why the momentum strategy works by the way. When something is rising people are drawn to it and want to be part of the group. As more people join the group of longs the price rises - until something happens to change the group dynamic. It could be a bad earnings report that causes some to fall out of love or it might be for some other reason that is hard to fathom. One day Apple is cool and the next it's getting mocked in commercials as unhip. That's probably another reason I'm not a momentum investor - I haven't been cool for a long time and I am hopelessly ignorant of pop culture and fads. 

My ideal investment is one that gets bought at a value price and then, after everyone else recognizes my briliiance, becomes a momentum play. Those are rare but the first part, buying value, is not that rare at all. In all markets there are things that are cheap, that the crowd is shunning. Obviously, it isn't as easy in a bull market but value can always be found if you look hard enough. And the first step is to do what Josh and Meb and I do - look at the things that are down. Today that would include almost all materials stocks (including gold miners), emerging market stocks and bonds, long term US Treasuries and don't forget Europe where everyone thinks things will never get better. That is far from a comprehensive list (and isn't in any way an investment recommendation by the way). A word about discipline though. When you make an investment you always need an exit strategy. If you buy something and it isn't working, your thesis is flawed, get out. It is better to take a small loss than watch it turn into a large one. The investing game, like most contact sports, is won on defense. It is hard on the ego to admit an error but it is a lot easier than opening your account every day and looking at that losing position that you know you should have sold.

Value investing to me is not a style or method; it is just investing. It doesn't have a fancy name like Risk Parity, but it still works just fine. Ignore all the fancy research churned out by the economic fellows and the Wall Street fee machine. Buy low, sell high. It's that simple and that difficult. Do it right and pretty soon you'll be doing the bugaloo too. 

Joseph Calhoun is CEO of Alhambra Investment Partners in Miami, Florida. He can be reached at

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