You’ve heard the saying, the best way to invest is to “buy low and sell high”. It makes sense right? If the market goes up and down all the time then buying when it’s low and selling when it’s high should make you some money, right? Well, not quite. Here’s why this phrase could be easily misunderstood: Timing. It assumes you know when a stock has hit rock bottom and when it has peaked. No one knows this. It’s quite possible for a share price that has dropped dramatically to keep going lower. Price focus. It makes you focus more…
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You’ve heard the saying, the best way to invest is to “buy low and sell high”.
It makes sense right? If the market goes up and down all the time then buying when it’s low and selling when it’s high should make you some money, right?
Well, not quite. Here’s why this phrase could be easily misunderstood:
- Timing. It assumes you know when a stock has hit rock bottom and when it has peaked. No one knows this. It’s quite possible for a share price that has dropped dramatically to keep going lower.
- Price focus. It makes you focus more on what the share price is doing rather than what the underlying business is doing. That’s why Warren Buffett says he evaluates stocks as part ownership in an actual business and not as ticker symbols.
- Short term focus. It distracts you from your longer term goals. In the short term, anything is possible in the markets. That is something most people forget particularly given that we’ve had relatively low volatility over the last year or so.
With that in mind, here are some stocks that have gone low recently that I wouldn’t buy:
Retail Food Group Limited (ASX: RFG). The owner of Donut King, Gloria Jeans and Pizza Capers has seen its share price smashed by a staggering 77% over the last year. Despite that, I still wouldn’t buy its shares. With plans to shut down over 200 stores, I see it as a business fighting for survival, rather than growing and dominating its competitors.
Myer Holdings Ltd (ASX: MYR). Even though its share price is down 60% over the last year, it’s failing to compete and attract customers from its rivals. At this point, its not even clear whether it’s the board’s strategy or management’s inability to implement it that’s at fault.
QBE Insurance Group Ltd (ASX: QBE). Its share price is down 23% over the last year and it can be tempting to buy a blue-chip when it’s trading lower. QBE’s problems however extend beyond that and it’s been on a slippery slope since 2007. There are no signs that will change any time soon.
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You can follow Kevin on Twitter @KevinGandiya.
The Motley Fool Australia owns shares of and has recommended Retail Food Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.