In most social circles, I’m just Debbie — aunt, sister or friend.
Professionally, however, I’m Deborah W. Ellis, a Certified Financial Planner and investment adviser for high-net-worth clients. I’ve been investing in the U.S. stock markets since I was in my 20s. My father encouraged me to save half of everything I earned. When I started doing that, my aunt helped me open a brokerage account and taught me about investing in the stock market.
Whenever I’m at a party, usually shortly after the cocktails are served, someone will discover what I do, and inevitably, they’ll ask for an investing tip or advice on what I think the next hot stock will be. Especially with today’s wild volatility, even I would require a crystal ball to know which company will skyrocket in value tomorrow, so I simply answer, “Buy low, sell high.”
That sounds easy enough. But is it?
Unfortunately, not.
Context matters
When it comes to executing the advice of buying low and selling high, many factors must be considered.
Buying low, for example, is a completely relative term. What does “low” mean? What does “high” mean, for that matter? When looking at the price of a stock, it’s only low or high in relation to something else.
Here’s an example: Let’s say a company went public in 1999. At its initial public offering, it was $12 a share. Twenty-five years later, the price per share has risen to over $800. That’s pretty high compared to its initial offering. That said, many people will consider $800 per share low enough to buy when compared to other stocks.
As you can see, what is considered low and what is considered high depend on the context and scenario at play. Common technical analyses developed to help come to a determination include:
- Price to earnings
- Price to sales
- Price to book
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While each of these comparisons provides a framework from which to start, the ratios themselves can be measured in several different ways, meaning the numbers can be viewed and interpreted from multiple perspectives. This is because a stock’s price relationship is more than just a simple single number or ratio. Many other variables come into play when evaluating a stock’s price, including:
- The stock’s price relative to other similar companies
- The stock’s price relative to the market as a whole
- The stock’s price relative to its moving averages (technical analysis)
- The mutual funds and exchange-traded funds that hold the stock
- Analyst rankings
'Buy low, sell high' is not a guaranteed strategy
All this means there is no guarantee that you will be able to buy a stock at a low price and then sell it at a high price. There are just too many other variables that come into play. (We haven’t even touched on your own temperament and history with money!)
This is why a thought-out and strategic financial plan unique to you and developed in cooperation with an experienced financial adviser is so important to your investment strategy. Knowing who you are, what your goals are and why you invest in any specific company will likely lead you to much greater investing success than any hot tip provided between mouthfuls of canapés at a party.
