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Buying low and selling high is harder than you think

Tristan Harrison

Businesses and shares may seem may seem like unemotional things, but the share market is a very emotional place.

Company valuations change everyday on people’s moods and feelings about a business on any given day.

People’s feelings become particularly emotional when share markets are in strong bull or bear markets. We feel ecstatic when our shares are doing very well, we think we’re the best and our portfolios are unstoppable. Perhaps we become too confident and make investments we wouldn’t normally do.

The exact opposite can be true when markets are going down, like in the GFC. When shares are going down we might panic and sell – which is the worst time to do so.

Experienced investors would know that shares are volatile. Volatility is the entry price for the great returns that shares create.

The investment saying is to “buy high and sell low”, but people often end up buying high and selling low. We don’t want to buy shares of businesses that seem like they’re almost down-and-out like BHP Billiton Limited (ASX: BHP) looked a couple of years ago.

To buy high we have to be brave when shares are low. Greencross Limited (ASX: GXL) and Telstra Corporation Ltd (ASX: TLS) are both close to multi-year lows at the moment. If you’ve wanted to own shares of either company then now could be the best time to buy them.

Perhaps in three years’ time Greencross and Telstra could be some of the best performing ASX300 shares. Or maybe not. That’s the trouble with the share market, nothing is certain.

Foolish takeaway

I don’t think buying shares at all-time highs like Cochlear Limited (ASX: COH) and REA Group Limited (ASX: REA) leaves investors much of a margin of safety for the short-term. To beat the market you have to buy shares which have good long-term prospects and are at a good price today.

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Motley Fool contributor Tristan Harrison owns shares of Greencross Limited. The Motley Fool Australia owns shares of and has recommended Greencross Limited and Telstra Limited. The Motley Fool Australia has recommended Cochlear Ltd. and REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.