You make money when you buy, not when you sell

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You make money when you buy, not when you sell

 

With our investment transactions, it is important to understand the art of buying and selling:

– without missing opportunities

– without getting caught in analysis paralysis

– without falling into the trap of emotional decisions

Buy Low and Sell High, right?

If we look at any investments, a famous adage of Baron Rothschild says: “Buy cheap, sell dear”.

This approach heavily relies on 2 assumptions:

  • Making the perfect purchase
  • Making the perfect sale

Overall, buying cheap and selling high is a very speculative approach: it can be highly profitable as highly risky.

Selling “dear” is often related to luck:

a) the right time and market may or may not come.

b) when you try to time the market, you don’t need to be right once but twice: when you pick the moment with the lowest price, and the moment with the highest price.

That’s why selling is an imperfect art. The overwhelming outcome for most sell decisions is too soon or too late.

 

A more pragmatic approach: make money when you buy

However, nothing to despair about; the stock market investor Warren Buffett recognised early on never to expect perfection:

“Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results. The better sales will be the frosting on the cake”.

This approach is a byproduct of his early mentor Ben Graham’s concept of a “margin of safety“. A wide margin of safety (between price and value) leaves room for error, but you still make a profit. Buffett focuses so much on buying right that selling should care for itself. In practical terms, most value investors try to buy an asset either at:

– less than its replacement value

– a price that is less than 80% of its intrinsic value

–  a price that is already profitable, without expecting extra growth: extra growth will be ice on the cake.

This approach is not unique to Buffett or Graham. Looking at the real estate market, we can find the same golden rule: you make money when you buy, not when you sell.

Based on this approach, we are invited to focus on the initial phase: select and purchase the asset at the right price! Once this is done, the profit has already been made, and a margin of safety has been realised: any following step is designed to monetise it most appropriately.

As such, great care must be taken to analyse the market and assets and … negotiate the purchase terms to secure a good transaction immediately. It is inappropriate to buy at “face value”, at “retail price”, or expect to realise the necessary gain during the eventual sale phase.

As usual, keep it real: Sweat Your Assets!

 

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