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Buy Low, Sell High

Written by Briton Ryle
Posted September 27, 2017 at 2:16PM

It is perhaps the most obvious piece of investment advice there ever was. "Well, duh, of course you want to buy when prices are low..."

The "strategy" is so obvious that most investors just ignore it or make fun of it (as in, momentum traders like to say, "Buy high, sell higher").

Problem is, a lot of investors really struggle to actually buy when prices are low. Because when prices get cheap, it's ultimately a supply thing: there are more people who want to get rid of the thing than people who want to acquire the thing. Bank stocks in 2008, retail stocks in 2017, oil stocks in 2014 — there are endless examples of full-on stampedes of sellers dumping stocks at basically whatever price they can get. 

And when investors are stampeding, it is very, very difficult to swim against the tide (how's that for a mixed metaphor?). A good stampede doesn't just start out of nowhere. There's pretty much always a good reason certain classes of stocks get relentlessly sold. It's at these times that investors become more concerned with the return of their money than the return on their money.

But there also comes a time when price has fallen so far that it's time to buy. This is a tricky one. Who wanted to buy bank stocks in March 2009? Pretty much nobody. Bank of America traded down to $3.14. Citi was $10.30. Even when bank stocks rallied +10% on March 9, the vast majority of investors simply could not switch the sell signal off in their brains. Even Warren Buffett's famous $5 billion bottom fishing expedition into Bank of America didn't happen until August of 2011...

Because how do you know when the price has reached the point where it is cheap enough to test the water? What's the magic number? Of course, there really isn't one. Or at least, it's different every time...

Follow the Leader

Oil stocks right now are a great example of how difficult it is to buy low and sell high. Who wants to buy oil stocks right now? With demand stagnant, a 2 million barrel a day oversupply, and tankers full of oil just floating around out at sea, it's pretty damn hard to construct a reasonable argument that oil prices will ever go higher again. 

One simple and effective way you can buy low is to follow the leader. You could have bought Bank of America around $7 right after Warren Buffett put his money up. But that might not have worked so well with oil...

Harold Hamm was one of the pioneers of fracking. His company Continental Resources (NYSE: CLR) basically put North Dakota's Bakken shale field on the map. His boldness made him a billionaire. In October 2014, he called OPEC a "toothless tiger." In early November 2014, he announced that he had cashed out all of Continental's oil hedges (oil companies typically use futures contracts to lock in a sale price for a certain portion of their production, thus hedging against price swings).

Continental was trading around $55 at the time. A month later it was dropping below $40, where the stock remains to this day. Oops. Selling those hedges ultimately cost Continental $1 billion in revenue in 2015 as oil prices continue to fall. 

How could a very successful oil man so misunderstand his market? It's a good question. And I don't know the answer. But plenty of people followed Hamm's lead into oil stocks — and got Hamm-ered. 

So, here's one thing. Hamm tried to call the bottom for oil. Saudi Arabia had already started overproducing. And oil prices were still falling. On the other hand, Warren Buffett waited over two years after the S&P 500 bottomed to make his investment in Bank of America. You could say he was fashionably late to the party. And he's still having a good time. On the other hand, you could say Hamm was stinking drunk by noon, got kicked out of the party, and had to pony up a cool $1 billion when his trophy wife filed for divorce. Bad day...

Can it Get Any Better?

I want to give out some props here to my man Christian DeHaemer, of Bubble and Bust Report. Back when oil was over $100, he was about the only person I know who was saying oil could fall to $40. Even though I've known Christian a long time, and I have great respect for his ability to see and really understand the macro picture, I didn't put much stock in his call on oil. 

Now, here's another thing about Christian that he may not want me to share (but this is my article, so too bad). Christian is a bit of a pessimist. He stresses, sometimes can't just relax and enjoy life. When oil was $100, he was wondering how the fundamentals for oil could get any better.

Turns out they couldn't get any better. 

I like to think I've learned my lesson this time. I review my portfolio and the recommendations I make in The Wealth Advisory and Real Income Trader frequently and with one question on my mind: can it get better for this stock? When the answer is no, I sell. That's why we sold Disney at $107 a few months back. It's why we took our 217% gains on Boeing (NYSE: BA). And it's why we booked our 85% in Micron Tech (NASDAQ: MU). 

The Disney sale was absolutely spot on. We've missed some upside on both Boeing and Micron. And I am absolutely fine with that. We bought low, we sold high, and we made good loot.

Selling High

Now, I'm seeing a couple instances of selling high I want to bring to your attention. The first is Sam Zell. He's the chairman of several REITs, like Equity Residential (NYSE: EQR), the biggest apartment REIT; Equity LifeStyle Properties (NYSE: ELS), a REIT that owns and operates manufactured home and resort communities; and Equity Commonwealth (NYSE: EQC), an office REIT. 

Sam Zell is selling...

EQC has sold off about half its properties over the last two years. 

Yeah, it's a REIT; buying and selling is what it does. And REITs tend to carry some debt, which, in this case, has been reduced with the cash raised in these sales. Still, it's something to pay attention to...

There's been a lot of good press for General Motors (NYSE: GM) lately. A Deutsche Bank analyst said it's a better play on autonomous cars than Tesla and gave it a $51 target, 25% from current prices. So why did its president sell 32% of his stock in September? That's about $116 million in proceeds...

And finally, a chart...


That's a monthly chart of McDonald's (NYSE: MCD). Quite the run higher, isn't it? McDonald's currently trades at five times sales and has a forward price-to-earnings (P/E) ratio of 22. It's valued at $125 billion and has $28 billion in debt.

I am asking myself: how does it get better for McDonald's?

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.


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