Physicians' Guide to Wealth

A guide for anyone pursuing financial independence

Buy Low, Sell High

Mar 9, 2022

We all know this very basic investing truism learned in our earliest years of life. What prevents investors from buying low and selling high, and why are so few able to accumulate wealth? The reason is the disconnect of emotions to theory. In theory, we will simply wait for stocks to drop in value, especially those of good solid, established large companies, scoop them up, wait for the stock prices to rally to new highs, and sell. How difficult can that be?

Well, it’s the emotional component that has not to be considered with this strategy and, in fact, even prevents one from executing well. For the past two years, the major indices, including the S&P 500, have rallied since March 23, 2020. Many were surprised not only by the rally but to the level the market bounced back. In 2021, the S&P 500 continued the positive trend reaching 68 new all-time highs to end the year with a 26.89% gain.

For those that missed some or all of this rally, one would think this selloff that started on the first trading day of this year would be a welcome change and viewed as an opportunity to invest. That is if they can put their emotions on the side.

The challenge of buying low and selling high is most investors are not able to invest with the constant barrage of bad news, and the reason stocks are down. The concern is that the last rally is the last rally. American economic growth is over, and for the first time in the history of this country will never recover. Ever.

This unrealistic scenario keeps many intelligent people from investing and missing buying opportunities every time because they are unable to remove the self-preservation fear of losing money. It’s this thinking that prompts people to sell at lows as bad news flourishes on CNBC and buy when all is good on the media front missing most of the rally.

So you don’t miss this next rally, as I am willing to go out on a limb and say American businesses will recover, the following are a few considerations:

First, the market and the US economy don’t go backward. Nyle provided a chart in his Brief titled, “This Too Shall Pass” of the S&P 500 since 1950 that illustrates every 10%+ correction in grey lines and the overall S&P 500 index price changes on the green line. Notice the S&P 500 since 1950 has a continued upward direction despite many corrections and provided steady gains for investors. More importantly, the index rallied to new highs after each correction and, after five years, never returned to previous lows. This track record is a tribute to American businesses and the free market economy so important to this country’s sustainability.

Second, each correction is a new buying opportunity. Here again, I refer to a chart Nyle provided illustrating since 1928 the blue bar as the index’s return for the corresponding year, with the red dot being the max correction for that year. Every year has a red dot, but not every year has a blue bar in the negative. Also, note that the majority of the following years ended in the positive.

An additional chart illustrates most recently since 2017, every time the S&P 500 dropped below its 200 Day Moving Average (DMA), it was a new buying opportunity. In fact, if investments were made at every crossing below its 200 DMA, the returns to investors were substantially higher. The best buying opportunity during these recent years that provided the greatest gain was in March 2020. Maybe an even better opportunity is developing now.

The last consideration is “this is not different.” I have people tell me now that history is no longer relevant as “this is different.” Really? Has the US ever experienced a worldwide viral pandemic? Refer to the more devasting Spanish flu of 1917 followed by the “Roaring 20’s”. What about wars? After the Civil War ended in 1915, the Dow Jones rallied 500% over the next 15 years. After WWII in 1945, the US economy experienced sustained growth, and the S&P 500 had an average annualized return of 9.5% from 1945 to 1966, increasing a cumulative 457%.

What Does This Mean to Me?

There are a lot of reasons to be worried right now. Inflation, Russia using Ukraine as a proxy to go to war with the West, the Fed raising rates, labor markets, supply chains, a pandemic that seems to never want to end, the market during a correction. However, if it weren’t for these disruptions and stock market corrections, new buying opportunities would not develop. The worst single day in the stock market in recent times was October 19, 1987. The DJIA dropped 23% that day! Those investors that invested that day not only earned 23% within 18 months when the market recovered but benefited from the rally that continued for another 13 years.

Give us a call as we welcome the chance to talk through your concerns and, more importantly, define an investment strategy to take advantage of yet another buying opportunity.




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