Is it better to buy at the top or sell at the bottom?

People often ask me as an advisor if they should be buying or selling. You know, buy at the bottom and sell at the top. Or as the cool kids say, “Buy dips and sell rips”. When I say I don’t know or I’m not sure, they give me a funny look or start telling me some story that will educate me on why I should be buying or selling. Basically, they start telling me what we should do.

Let me preface this with one point. Most of our longer-term clients don’t do this. This is cocktail party banter for the most part. I like to say if I knew the tops and bottoms, I would be on my yacht in the Bahamas and would not be talking to them.

I read many of the great investment sages around on a continual basis trying to figure out where we are or what they are thinking. One I always enjoy is Howard Marks’ (Oaktree Capital). He was recently interviewed around the risk in the current markets, “Which Way Now? A Conversation with Howard Marks”. Watch the interview by clicking here.

What I really enjoyed was his very simple discussion around timing. Everyone is concerned with buying at the top and watching it go down, probably more than selling at the bottom and missing out on the next upward move.

Investors are pretty much all built the same, and one consistent trait is that we hate losing twice as much as we enjoy winning. This may go back to our conditioning as humans. We might have been out collecting berries. We have enough, but we keep pushing for more around the backside of the bush. A bear eats us. Better to get out with something.

Howard Marks goes on to highlight that if you buy at the top, yes, your value may drop with a crash or correction, but you are in. Markets go up over time, and if you have a long-term horizon, you will still make a solid return. If you sell out at the bottom (or at any time for that matter), you may never get back in. Yes, you have protected your capital, but you may have also guaranteed that you will make nothing.

Now let’s follow this up with a few more points. Firstly, deciding what you should do with available funds has more to do with your risk tolerance and timelines than what the market is doing. When are you going to need the money? What would happen if the portfolio went down by 30 per cent?

Secondly, you don’t just buy anything, and you definitely don’t buy the popular headline. You need to have a plan and be disciplined. Our investment partners are all value focused. Buy good businesses or real estate (equity or debt), and buy them at a discount.

Yes, it pays to be attentive. Increasing your cash or fixed income balances in times of turmoil, taking a higher risk profile when things are on sale or locking up some of your capital for longer periods for better returns are wise considerations.

If you would like more from Howard Marks let me know. His Memo from July of this year “I Beg to Differ” is a great read, and I would be happy to forward it to you.

Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Les Consenheim, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.