Risk | Choose Stocks Wisely

Buy Low OR Sell High

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.

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Risk is the Downside

When purchasing common stocks, the name of the game is risk avoidance. If you avoid losing money, you stand to do well in the stock market. You buy a stock to achieve a return, but achieving a return depends on buying quality stocks when they are trading at bargain prices. That is, you make a good stock investment when you buy stock in a solid company that is underpriced. When you do this, you have minimized risk by minimizing your potential loss. If you want to achieve good returns consistently, don’t focus your attention on the possible return; focus on minimizing your risk of loss when you buy.

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