At least part of the justification for going off and obtaining a college degree, I remember being told, was that college would help train you how to think and how to learn. Rather than equipping you with skills that will be directly and immediately applicable to employment, a well-rounded liberal arts education was to prepare you to grow over the long haul. Of course, college is more than that. The development of social networks, transitioning to life on your own – but with some training wheels that a campus provides – and learning how to be self-accountable for delivering results are all important. Oh yeah, and the knowledge from course work shouldn’t be left out. But a lot can be said for college simply preparing you for how to think. I can only speak for myself, but I believe this was all pretty much on point. It was certainly true in the analytical field of economics (my major of choice). An economics education instills a mental framework that prepares you for breaking a complex issue down into its various parts and isolating the individual pieces for analysis; something that has come in quite handy for a career in the investment industry.
Thinking correctly and mindset development wasn’t delivered with the diploma; it has been a career long mountain to climb. And I’ve yet to catch a glimpse of the top. This journey has required tons of reading in order to borrow from others who have learned and are sharing perhaps just an angle or two that they have mastered. Howard Marks’s writing over the years has meant as much as any to me in helping to think better about investing. Objectively learning lessons from experience – especially from the painful mistakes has been another big factor in chiseling away poor ways of thinking. For me, long walks alone with my thoughts and creating a stillness of mind have had a positive impact. One simple example of how all those tools for the journey have converged and been necessary in order to correct thinking gone awry can be found in the quip to “buy low, sell high”.
“Buy low, sell high” is so intuitive that it is easily grasped by all and so pervasive that we’re all but certain to hear it many times a year. Yet, this tenet in an improper context is detrimental for making investment decisions. Keep in mind, it has taken me reading from others and learning from mistakes for me to understand that. I still battle this concept in my head many times during a given year and work hard to clear it from the thought processes that lead to investments being made. Sharing this in public print may seem a bit risky considering my job of allocating client assets. However, I firmly believe it is a good thing, not a bad thing, to be able to identify and admit to blind spots in order to continually improve the investment process.
To be clear, it isn’t that the spirit of buy low, sell high is wrong. I absolutely do want to buy assets that are reasonably priced. If it happens to be “low”, even better. The problem is that it can interfere when applied too broadly. For instance, what if we have a reasonably priced asset on our radar and it moves up to a new all-time high in price? If it’s at an all-time high, then it is easy to call it “high” and therefore at a place to sell, not buy. After all, arithmetically it certainly is higher than it has ever been in price. However, one of the great ironies in investing, and one that makes the “buy low, sell high” mantra problematic is that all-time highs are safer entry points over time than all-time lows. If this is a new concept for you, you may need to sit down and pause for that to sink in. It is a shocking revelation when you first learn this truth.
Being at a fresh high is a signal that things are healthy. True, it may mean that you missed out on part of the appreciation, but it’s a clear sign that right now buyers have stronger hands than sellers of the stock. Perhaps most importantly, at an all-time high – not a single person in the stock can be sitting at a loss. Our primal instincts are to part ways with investments that are in the red, and no one is at a loss when the stock is at an all-time high. My colleague Andrew Thrasher says this often and has been instrumental over the years in beating this into my brain that you want stocks that have nothing but blue sky above them.
Its true that at some point in time, sustained appreciation can eventually lead to “high” territory. And in this way, “high” territory may depart from what has been a reasonable price. At that point, a re-evaluation may reveal better opportunities elsewhere. But it is NOT because it is at an all time high. There are countless other things that involve being in the right mindset when making good investment decisions. This is but just one corner – but for me a very crucial one for making good decisions.
