Yes, I know.  It’s “buy low AND sell high,” not “buy low OR sell high.” However, I want to make a case in this post and the next that knowing how to buy quality stocks at bargain (low) prices is much more important than knowing how to sell stocks at high prices.

Intuitively, if I know how to buy low but not how to sell high, I face a low level of risk of loss since I’m buying at a base level from which the stock price is unlikely to diminish significantly, even if the company does not perform as well as I would like for a spell.  On the other hand, if I know how to sell high but not how to buy low, I’m assuming significant risk since I’m dependent on things going well for the company such that I have opportunity to realize the high selling price.  Further, since I don’t know where “low” is, I’m vulnerable to finding that out the hard way if things don’t go so well for the company involved.  My personal record of success reveals that if you know how to buy quality stocks at low prices, you will likely exceed normal market returns regardless of how seldom you manage to sell near high prices achieved by the stocks you buy.

Clearly, if you consistently sell stocks at prices higher than you paid for them, you will consistently make money on your stock investments.  Further, if you know how to buy stocks in solid companies when the stock prices are undervalued (i.e. low), you can consistently sell at prices higher than you paid.  Going another step, by consistently buying quality stocks at bargain prices, you will minimize potential losses while maximizing potential gains.

Exactly when is a quality stock priced low?  Some might say that it is when the stock price of a favored company has fallen by a certain amount from a former price level achieved.  Others might conclude it is when the stock price of a well-known company is lower than its peers when comparisons are made based on certain financial ratio metrics?  While these answers may certainly hold some relevance in some situations, they do not carefully define quality or a low price.

I define a low price for a quality common stock as one where I’m buying a stake in a healthy balance sheet near a price I would expect to realize if the subject company closed its doors today and distributed its assets.  There’s a bit more to it than this…..you’ll have to read my book for the full picture.  However, I will say it comes down to knowing how to assess a company’s balance sheet well.  I hope I’ve whet your appetite a bit with the notion of buying low being a key to success in the stock market, whether you know much about selling high or not.