{"id":17780,"date":"2023-06-03T17:19:46","date_gmt":"2023-06-03T21:19:46","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/how-to-build-wealth-buy-low-and-sell-high-consistently\/"},"modified":"2023-06-03T17:19:48","modified_gmt":"2023-06-03T21:19:48","slug":"how-to-build-wealth-buy-low-and-sell-high-consistently","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=17780","title":{"rendered":"How To Build Wealth: Buy Low And Sell High Consistently"},"content":{"rendered":"
\n

<\/picture>
<\/figcaption><\/figure>\n<\/p>\n

Sure, the title to this article appears to be a bit over-ambitious. Almost no one can always buy at the bottom and sell at the top. Not even the legends like Warren Buffett. But we do not need to buy at the bottom and sell at the top. There is a difference between “buying low and selling high” and “buying at the bottom and selling at the top.” The strategy we discuss is about buying or selling small quantities of shares (of a stock) when certain thresholds are met. This idea is not new and could be attributed to several famous people and past authors.<\/span><\/p>\n

So, what is the idea? This is a systematic and methodical approach to investing in solid blue-chip dividend-paying stocks. The approach appears to provide lower volatility and higher long-term performance over the S&P 500 Index (<\/span>SP500). In our back-testing model covering nearly 28 years, the model provided an alpha of nearly 5% annually over the S&P500. This extra 5% annual outperformance can result in a huge difference over 28 years. That said, there are certain shortcomings. This method is not for folks who want or need to invest a large sum of capital in one lump sum. This is mostly beneficial to folks who would have a regular income stream and the ability to invest regularly over a long period of time.<\/span><\/p>\n

So, in brief, here are some caveats:<\/p>\n

    \n
  1. This is not a get-rich-quick scheme. It is not easy to follow a strategy consistently with discipline for a decade or more. It is often easier said than done.<\/li>\n
  2. The strategy needs some knowledge of the market. It does not eliminate the need to pick the right kind of companies. However, if you pick a few bad apples along the way, it won’t hurt the long-term results too much.<\/li>\n
  3. The strategy does not work very well for lump sum investments. It requires capital inflows over several years.<\/li>\n<\/ol>\n

    Note: We have written about this topic a few times in the past on SA, and every once in a while, we come back to re-evaluate the strategy by means of back-testing. This provides us and our regular readers to validate the process and its success. At the same time, it gives new readers fresh ideas and something to explore.<\/em><\/p>\n

    Is This Strategy A Right Fit For You?<\/strong><\/h2>\n

    Not every strategy is right for everyone. You are the best judge to see if a particular strategy would fit your needs and temperament. This strategy requires discipline, patience, and time to be able to grow wealth over time. It is not for short-term traders. It also requires that you invest gradually over time and need fresh capital every now and then for many years. That means you can’t invest in just one lump sum. It is ideally suited for folks who are in the accumulation phase and are willing to save and invest on a regular basis for a couple of decades.<\/p>\n

    Buy-Low Sell-High Strategy [“BLSH”] Using DGI Stocks<\/strong><\/h2>\n

    Assumptions:<\/strong><\/h3>\n

    The strategy requires that you invest overtime in small lots and not in one big lump sum. It suits the working folks perfectly because they earn a regular wage and generally invest (or can invest) a fixed sum of money at regular intervals. However, if you are retired, it may seem that the strategy would not work as all your money is already invested. But that’s not wholly true. Retirees could also transition their portfolios to work on this strategy. They could earmark some of their holdings for this strategy and sell overvalued securities to raise some cash to be able to buy later. Since the strategy itself tells you when something is overvalued and when something is undervalued, there is no guesswork needed.<\/p>\n

    In summary:<\/p>\n

      \n
    1. It is best suited for folks who are in the accumulation phase.<\/li>\n
    2. For folks who are in the withdrawal phase (retirees, for that matter), it will be less appealing. That said, they can still adopt it, at least on a limited basis.<\/li>\n
    3. The strategy does not allow a lumpsum investment.<\/li>\n<\/ol>\n

      There are two parts to the strategy, the buy strategy and the sell strategy.<\/p>\n

      Buy Strategy:<\/strong><\/h3>\n

      The first task is to select at least 10 (or more) stocks. We need to select the stocks with the following criteria in mind.<\/p>\n

        \n
      1. They should be fairly large and stable companies with a market capitalization of over $10 billion.<\/li>\n
      2. All our companies would be dividend-paying companies. We should require that they at least have a 10-year dividend growth history.<\/li>\n
      3. We should also select half of the companies that have a history of doing relatively well during large corrections and recessions.<\/li>\n<\/ol>\n

        Target Buy Price:<\/strong><\/h3>\n

        For each stock in our portfolio, we will calculate the average of the past 252 trading days, which is generally equal to one year of trading data. Subsequent to this, we will multiply this average price by a ‘Buy-Low Factor’ to derive the target-buy-price. This factor is explained in the next para. We can do this on a daily basis or weekly basis. For the purpose of the back-testing presented in this article, we have used daily data (end-of-day data). Once the current price of a stock is below the “target-buy-price,” that will signal to add\/buy some shares. How many shares we buy will depend upon the total shares we can have for this stock and our current holding.<\/p>\n

        Buy-Low Factor:<\/strong><\/h3>\n

        This is something that will be used to determine the buy price for our next lot for a particular stock. The buy-low factor can generally vary between 0.85 to 0.90 depending upon the volatility of the stock.<\/p>\n

        The value of this factor will vary between 0.85 to 0.90 since we will only be using dividend stocks. If, for any reason, you decide to use high-growth tech stocks, the value of this factor should be lower, like 0.80 (or less). For any given stock, we should look at the annual volatility. For low-volatility stocks, the Buy-Low Factor would be 0.90. For stocks with medium volatility, it should be 0.85.<\/p>\n

        You can obviously check the volatility of any stock (over a given period) and compare it with the S&P500. However, to keep things simple, you could also categorize stocks based on their past history and the industry they operate in and determine how volatile they are.<\/p>\n

        Some examples of low or high-volatility stocks:<\/p>\n

          \n
        1. The Coca-Cola Company (KO), PepsiCo, Inc. (PEP), or The Procter & Gamble Company (PG) can be considered as a low volatility stocks.<\/li>\n
        2. The Home Depot, Inc. (HD) or Lowe’s Companies, Inc. (LOW) would be considered medium volatility stocks.<\/li>\n
        3. Stocks like Microsoft Corporation (MSFT), Apple Inc. (AAPL), or Amgen Inc. (AMGN) could be considered slightly higher than medium.<\/li>\n
        4. Some examples of high-volatility stocks can be found in the tech sector. Many of them do not pay dividends, so they would not qualify for the test. Companies like Amazon.com, Inc. (AMZN) would be one example.<\/li>\n<\/ol>\n

          Nonetheless, for the purpose of this back-testing and simplicity’s sake, we will use the buy-low factor as 0.90 for all our stocks (that we use in back-testing)<\/p>\n

          Example:<\/p>\n

          Stock: Procter & Gamble<\/p>\n

          Volatility: Low<\/p>\n

          Buy-low-factor: 0.90<\/p>\n

          Initial shares to buy: 50 (the split-adjusted number could be a higher multiple)<\/p>\n

          Incremental shares to buy: 50<\/p>\n

          Maximum holding for any stock:<\/p>\n

          In our back-testing, we will put a maximum limit of 250 to 300 shares. However, please note that this does not include shares acquired from the reinvested dividends. Also, this does not include share increases due to splits.<\/p>\n

          Sell Strategy:<\/strong><\/h3>\n

          Sell Strategy is, in fact, optional. If you are a buy-and-hold kind of investor, you may not sell at all. However, that would mean that you would need to constantly add new money to the portfolio to be able to take advantage of buying opportunities (when the price of an existing holding is low).<\/p>\n

          That said, many (if not most) investors would like to sell at least partially when a stock is overvalued and may buy it back when the price becomes attractive.<\/p>\n

          Target Sell Price:<\/strong><\/h4>\n

          Similar to the buying strategy, for each stock in our holdings, we will calculate the average price of the past 252 trading days. However, unlike the buy-strategy, the sell-strategy will use multiple criteria before a sell decision is taken. <\/strong>This is done to ensure that we do not end up selling too soon.<\/p>\n