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

If we look at any investments, a popular 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, buy cheap and sell high is a very speculative approach: it can be highly profitable as highly risky. Selling “dear” is often related to luck: the right time and the right market may or may not come. That’s why selling is an imperfect art. The overwhelming outcome for most sell decisions is too soon or too late.

However, nothing to despair; the stock market investor Warren Buffett recognized it 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 puts so much focus on buying right that selling should take care of 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 nor Graham. If we look 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 our energies on the initial phase: select and purchase the asset at the right price! Once this is done, the profit has already been made, a margin of safety has been realized: any following step is designed to monetize it most appropriately.

As such, great care must be done analyzing the market, the assets and …negotiating the terms of the purchase to secure a good transaction immediately. It is definitely not appropriate to buy at “face value” , at “retail price”, or expecting to realize the necessary gain during the eventual sale phase.

As usual, Sweat Your Assets!