Buy low, sell high

“Past performance is not a reliable indicator of future results.”  As fiduciary advisors, this statement is burned into our psyche at Bryant & Brannock.  We were reminded of this recently when our conversation with a client turned to his account performance since the latest rebalancing of his portfolio.  The positions we reduced outperformed the positions we added to.  In other words, he would have been better off if we had done nothing.  Ouch!  Why skim from the winners and beef up the losers?  It is a great question and one that is especially timely.  The Dow Jones Industrial Average index, the S&P 500 Index and the NASDAQ index all hit record highs last week. 

Most of us are familiar with the old adage to buy low and sell high. It makes sense whether you are talking about stocks, baseball trading cards or Beanie Babies.  If we sell something for more than we paid for it, we make a profit.  That is a simple concept.  It becomes more complicated when you take into consideration variables such as time horizon, present value and future value.  For example, the discounted meat at the grocery store has a limited shelf life, and clothing that is marked 50% off is probably no longer in fashion or is out of season.  Conversely, we expect to pay more for fresh meat and the trendiest fashions coming right off the runway.  We inherently understand the influence of time horizon on these types of products. 

What happens if we change up the variables a little bit?  Maybe you have a big freezer so you can stock up on discounted meat.  You take on the risk of potential freezer burn or perhaps a power outage, but you are willing to assume that risk to save money now.  And maybe you don’t care about being fashionable, or you can wear shorts in January because you don’t spend much time outside.  Your ability to control these variables allows you to apply a different present value and future value to these items than other people might.

Determining the present value and future value of stocks is much more complicated.   There are many, many variables to consider, and we have virtually no control over any of them.  We can mitigate some of that risk by investing in baskets of stocks, like an index, rather than buying individual stocks.  We can further reduce risk by investing in a variety of sectors.  Certain market conditions will benefit some asset classes more so than others.  This philosophy of diversification is the foundation of our approach to investing.

Which brings us back to that basic investing principle of buying low and selling high.  With investments across a broad range of asset classes, some sectors are going to outperform others at different times.  We can’t know for certain which sectors will be in the best position for growth over the upcoming time frame.  By periodically rebalancing, we force ourselves to sell positions that have done well, and to buy positions that have underperformed.  We are selling high, and, hopefully, buying low.  We believe that this system, done with the appropriate asset allocation, provides a practical approach for long term investing.