Stock market mentors often advise new traders to "buy low, sell high". However, as most observers are aware, high prices tend to lead to increased purchases. Conversely, low stock prices tend to scare rather than attract buyers. These models are probably better explained by an expert in psychology than by a finance expert, because emotions are at the root of many of these decisions.
To succeed in the long term as an investor, you have to recognize and understand the patterns. However, if one looks for specific attributes and uses protection strategies, investors can make buying and selling decisions that satisfy both human psychology and the need to generate positive returns.
Investors seldom follow the advice of Buy Low, Sell High
Let's be honest. Most investors know how to buy low and sell high. We know that in order to find low-priced equities, it is generally necessary to find equity with a P / E ratio close to 1% and a growth rate of at least 2%.
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We can also use mentors like Warren Buffett. It will not give investors real-time updates on its purchases and sales. However, he explains many of his decisions after the fact. He also leaves us with memorable quotes on value investing. We quote the mentality "buy low, sell high":
"We are just trying to be scared when others are greedy and to be greedy only when others are scared."
<p class = "web-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Despite our vast resources, most investors do not apply they continue to offer the price of Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) higher despite EP ratios above 150. They also show little interest in Ford (NYSE:F) despite a PE ratio of around six. "data-reactid =" 18 "> Despite our vast resources, most investors do not apply this information. Amazon (NASDAQ:AMZN) and Netflix (NASDAQ:NFLX) higher despite EP ratios above 150. They also show little interest in Ford (NYSE:F) despite its PE ratio of about six.
Watch stock averages
In fairness, such disparities could be justified on the surface. The stock of AMZN has doubled in the last 12 months. The Ford action fell by nearly 10% over the same period. Such behavior of actions generates a powerful but dangerous psychological motivation for investors to buy up and sell down.
Many otherwise talented investors go bankrupt as a result of such emotions. Investors like Buffett, who seem to buy low, sell high, know it well. They earn even more money when strong emotions inspired by fear motivate investors to sell him at a low price. Mr. Buffett makes generous profits when negative emotions subside and actions resume their rise.
As investor John Bogle said: "The rule of iron financial markets" is the return to the mean. "
Despite short- and medium-term trends, investors should expect such a turnaround to happen in the long run. Although delays are difficult to predict, investors can use strategies to mitigate the dangers of their expensive and undervalued positions.
On an expensive stock, such an approach might be suitable for an investor knowing that an action which it owns has become overvalued but does not want to sell as it continues to rise.
Understanding the "Puts"
For example, maybe an investor who bought 100 XYZ shares at $ 200 per share. If this trader worries about a crash in the next three months, he can secure his $ 20,000 position. This insurance comes in the form of a long sale.
Puts give an investor the right to sell a fixed amount of shares (100 shares per put option) at a certain amount (called the exercise price) for a given period. If this investor decides to secure his position over the next three months and that such a sale is trading at $ 10 per option, he can insure the 100 shares at a strike price of $ 200. per share for $ 1,000.
If the stock stays above $ 200 per share all the time, the option becomes worthless and the investor incurs a loss of $ 1,000 on the put option. If the crash is feared, the investor may exercise the option while selling his position on XYZ at a price of $ 200 per share.
In such a case, that person earns 19,000 USD (20,000 USD for the stock less the cost of 1,000 USD of the option). Without this option, a sale of the stock would have generated only the current price multiplied by 100 shares, regardless of the fall in the stock.
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Also, if the loss occurs well before the # Expiry the investor could sell the option itself for a premium and possibly profit the fall in stock prices. In one case as in the other, the ownership of the option greatly reduces the losses. "Data-reactid =" 32 "> In addition, if the loss occurs well before the expiry date, the investor could sell the option itself at a higher price and eventually profit the fall in stock prices. Either way, having the option greatly reduces the losses.
What to look for in cheap stocks
The story continues
Protecting a position for a low-priced title would work differently. First, look for long-term earnings growth. Over time, earnings growth requires either the PE ratio or the stock to increase.
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "In such a scenario, the course of the In the case of stock F, the PE ratio at six makes the stock less likely to fall, since the PE ratio is lower than the long-term average of stock F and the S & amp; P 500 in general. As a result, any increase in net income would likely increase the security. "Data-reactid =" 39 "> In such a scenario, the price of the action tends to increase in most cases.In the case of the stock F, the ratio of PE to six Indeed, the six holdings are below the long-term average for F shares and S & P 500 in general. As a result, any increase in net income would likely result in higher shares.
A second option would involve dividends. Returning to Ford, Share F pays a dividend yield of approximately 6% at the time of writing this report. Modest earnings growth over the next two years may not bring buyers to the stock.
However, the 6% return will remain profitable for the investor until earnings growth improves in the long run. Both strategies offer investors a return, even if the average return of the shares remains in years.
Final Thoughts on Low Purchase, High Selling
Business strategies can make buying low and sales more profitable and psychologically acceptable. Human psychology is often the driving force of actions. Such emotions often result in more expensive actions and less expensive actions. While history tells us that a return to average will occur at some point, such a move could take years.
However, long positions can protect against falling prices of an expensive stock. On the other hand, low PE ratios and dividends in growth potential companies increase the odds of return on undervalued equities, even in declining markets. By taking into account emotions and increasing profit opportunities, investors can more easily follow this simple but difficult stock market advice.
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "At the time of writing these lines, Will Healy did not hold any position on the aforementioned shares. You can follow Will on Twitter @HealyWriting."data-reactid =" 45 ">At the time of writing these lines, Will Healy did not hold any position on the aforementioned shares. You can follow Will on Twitter @HealyWriting.
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