What Does It Mean To Buy Low, Sell High?

Buy low, sell high is a strategy where you buy stocks or securities at a low price and then sell them at a higher price. Buy low, sell high is definitely easier said than done. I know I started off my investing career pursuing this idea, and in doing so, I was sucked into focusing on the stock price and technical aspects of trading. I remember thinking that I was a value investor because I was buying cheap, beaten down stocks, but I was not focusing on the business fundamentals at all. I would look at a chart and think, “Wow, the stock price has dropped so much; it is definitely cheap, so I’m going to buy.” In retrospect, I was an insult to other value investors simply because I looked at charts and decided if I should buy stocks or not. In this week’s blog post, I will talk about what it actually means to “Buy Low, Sell High”. Let’s dive in.

Value investing revolves around the notion that markets are not fully efficient i.e. markers are roughly efficient. What does a fully efficient market look like? According to investopedia, if markets are fully efficient, then all information is already incorporated into prices, and so there is no way to “beat” the market because there are no undervalued or overvalued securities available. As value investors, we understand that markets are going to be roughly efficient, so there are going to be times when some stocks are oversold due to investor’s emotions, psychology, overly pessimistic views, etc; it is during these times when value investors capitalize on those mispriced assets. Now, there are two important takeaways here: First, there is always a reason why the stock is cheap – the market has discounted that reason into the stock price. Second, if the stock fundamentals are good and the market is just overly pessimistic about that asset, then you might have found yourself a mispriced asset that you can capitalize on. 

Let’s look at an example that appears to be a great “buy low, sell high” opportunity on chart, but in reality, it should not even be touched with a 10 foot pole. We can look at JC Penney, which filed for bankruptcy on Friday, May 15, 2020. In 2017, one could have looked at this chart (below) and convinced himself that looking at the history of the stock price movement, this stock price is definitely at its lowest point. Said differently, the highlighted region in the chart would’ve been the perfect time to act on the “buy low, sell high” rule. By doing a little bit of digging on the fundamental side and with the understanding that markets are mostly efficient, one would have propelled away from this stock. If we look at the highlighted Financial Leverage and the Debt/Equity ratios, it was evident that JCP was taking on more and more debt. Comparing the latest quarter ratios to those of 2011 will show how JCP had fundamentally deteriorated.

JCP

JCP Ratios

Even though JC Penney’s stock was “cheap”, there was a reason behind the low price i.e. it was taking on more debt and setting itself up for failure down the road. When making investment decisions, it is very important to look at the business fundamentals and not just the stock price.

Let’s look at a stock that Superior North recently added to its portfolio – Valero. I performed a Discounted Cash Flow (DCF) analysis using a very conservative discount rate on VLO and found the intrinsic value to be about $35/share. I noticed that as a refinery, Valero makes the most money when oil prices are low, which is the current situation. I also noticed that Valero was fundamentally strong enough to survive until gas demand picks back up; for the past 10 years, notice how the Financial Leverage and Debt to Equity ratios for VLO have been fairly constant, which indicates business stability.

VLO

VLO Ratios

Moreover, I did some balance sheet analysis with VLO. I looked at the current assets ($18,969 Million), non-current assets ($34,895 Million), current liabilities ($13,160 Million), long term debt ($9,178 Million), and shares outstanding (412 Million). We can take liabilities at face value, but we need to discount the non-current assets. So, based on the balance sheet analysis, I would expect the stock to be worth:

{[(Current Assets + 55% of Non-Current Assets) – (Current Liabilities + Long Term Debt)] / Shares Outstanding} = [(18,969+(0.55* 34,895))-(13,160+9,178)]/412 = $38/share.

Following the golden rule to buy low, I started adding Valero to Superior North’s portfolio as soon as VLO started trading under $35/share. The stock traded under $35 for a couple days, and soon went up in price. It is crucial to understand that in order for the “Buy Low, Sell High” rule to work, one needs to analyze the fundamentals of the company. I had fundamental analysis (i.e. DCF analysis, Balance sheet analysis, company stability, etc) to back my thesis up that I was truly getting bargain prices when the stock started trading under $35/share.

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Hope you learned a little and found this blog post helpful. We talked about what it truly means to “Buy Low, Sell High”. We looked at a couple of examples – JC Penney and Valero. As always, you can sign up for our free mailing list here.  You can sign up for our paid subscription services here. Like us on our Facebook page here. Thank you!


Superior North LLC’s content is for educational purposes only. The calculators, videos, recommendations, and general investment ideas are not to be actioned with real money. Vyom Joshi is not a professional money manager or a financial advisor. Contact a professional and certified financial advisor before making any financial decisions. Please review the Disclaimer and Terms and Conditions.


2 Comments

  1. Vyom, very well articulated. Many new stock market investors make this mistake. I guess we end up learning from our own mistakes but I hope more people read it which intern would prevent them falling in the usual pit. Really appreciate the examples you have presented.

    Like

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