Paradox - When to buy & when to sell a share?

Question

Warren Buffett says buy when everyone is selling and sell when everyone is buying. Taking into consideration the support and resistance levels, everyone is selling near the resistance level and everyone is buying near the support levels. If we follow Buffett's advice, aren't we going to incur loss in every trade?

Answer 1

I believe you are confused by the vague language.

Trading is a process where smart money and institutions take money from the public. Consider the concept of "market cycle". Institutions start a trend, buying in at the bottom, and only then it gets the public's attention and they start buying in higher, chasing the price. When the public is at peak euphoria, feeling so smart, institutions start "distributing" their position to this panic-buying and soon to be bagholding public. This is the market cycle phase known as distribution. After institutions dump their position on the public the market starts contracting as the public sells lower and lower than they bought in. When the public is at peak panic, the "accumulation" phase happens where institutions buy positions from the public at the bottom.

Warren Buffett says to buy when "everyone" is selling, and sell when "everyone" is buying. When he says "everyone" he is talking about the public, Joe Sixpack. To rephrase, what he means is "Be like institutions, accumulate during peak public panic and distribute during peak public euphoria".

Being a long term value investor, he is speaking in terms of timing trades with the broad market cycles. This is not daytrading advice. Don't get confused and think this should be applied to every technical signal, blindly doing the opposite of what they say. It does not mean to buy when moving averages cross down, or to sell when macd cross up. It certainly does not mean to sell above support and buy below resistance.

Answer 2

It's worth noting that Warren Buffett is a value investor, not a trader. As such, it doesn't tell you much about technical analysis or trend following.

Instead, he's implying that when the market gets overly excited (overvalued) or panics (undervalued), there are opportunities for long-term profits, assuming you do your due diligence and have an opinion of what the fair value should be.

Note that it's difficult, if not impossible, to consistently time and beat the market and that the costs incurred by frequent trading eat away at your profits.

Answer 3

Not at all. The time period where everyone is selling a stock and when everyone is buying a stock may be years apart. The exact dynamics of what's happening precisely when you buy and precisely when you sell won't significantly affect the profit or loss you take on a trade. What will, however, is whether you bought or traded the right stock, and that's what Buffett's advice is intended to help you do.

If everyone is buying a stock, that likely means its price is higher than its value. That's makes it a good stock to sell. If everyone is selling a stock, that pushes its price below its value. That makes it a good stock to buy.

Answer 4

Like others have said, Warren is a value investor. He is not really interested in technical analysis or trend spotting. He buys a company that he has determined is undervalued, and waits for it to be overvalued.

He has a quick way of checking the fundamentals and presumably puts the company through a model that in a few minutes, will tell him whether the firm is undervalued.

Here is what I wrote for another question similar in nature:

Value investing involves looking at a firm's fundamentals and coming up with an "intrinsic value" per share. From there, you determine if the stock is under or over valued relative to market share price.

A disciplined value investor will sell when their models say that the stock is no longer undervalued. Any interest in that company after that is not value investing and is simply betting on the stock. Of course an investor will update models and change them appropriately throughout the investment period to make sure their models reflect current conditions.

There is no average or expected time it takes for an undervalued stock to appreciate. The idea with value investing is that the market will correct "mistakes" made in undervaluing a company. It could also be that the firm's fundamentals point towards a strong outlook (typically 10 years) and the market has yet to realize this.

Hope this helps you make sense of things!

Answer 5

Investors and traders have different perspectives on markets. If a security's price falls further from an initial buy, a trader may have a stop loss or just sell because the trend is downward, while a long-term investor would view that price fall as a buying opportunity.

A value investor's time frame is typically much longer than a trader's time frame (years vs. months), so you can't really compare what Buffett says to a short time frame. When Buffett says to buy low, sell high, buy in panic, sell in optimism, his price to buy is with respect to his evaluation of intrinsic value, not to technical patterns. Usually, short-term price movements are of no concern to value investors, unless a price move reflects new information that has a big impact on the investors' appraisal of value.

Answer 6

The theory couldn't be more straightforward. You sell when you find better things to do with your money. Either sitting on your current account or other investments. It follows that that's the same reason to buy, ie because your money will be more productive allocated in an investment.

In the meantime — most of the time — the investment is left alone either compounding or generating cash via dividends which you have to allocate in turn or, in some cases (pure value investing), eventually realizing its fair value.

Allocating capital is simply done after an estimation of future returns of all the universe of possible investments at any given time for a somewhat arbitrary long period into the future.

Support and resistance levels is just witchcraft lingo.

Answer 7

You need to realize first, that your broker is using it's own algorithms for all the financial data and price values for you, those algorithms are especially designed not in your favor, not at all. So for example if the price of a popular share has drastically risen by a huge amount and if it especially happens that you are holding some of those shares, it might happen the the broker uses an attention based price model for you, so you will still only see the usual low price for that asset as long as you keep checking the price every few minutes.

But since the broker has to globally synchronize the huge price rise of that asset at some point, it might simply happen, that once you go to sleep, or take a day off, you'll get that huge price spike for a short duration only, so that you won't probably be able to sell it in time, before the price decreases again.

What you could try to do on the other hand is, with time you could try to learn how to beat such algorithms and to use them in you favor, for example "Stop Loss hunting" is something what most brokers are using for their algorithms against you, but what if you are absolutely sure that an asset has a huge potential, then you could buy a small amount of it first and if possible using a high leverage. This position's stop loss would then be your lure for the big fish, that means you are gambling that your broker will hunt for your Stop Loss at some point, but by doing it, the price of that share will decrease and once your Stop Loss gets triggered, you immidiantely open a new position at a lower price, but this time you'll use a medium amount and if possible an even bigger leverage. You can repeat this process a few more times, until you think the price got low enough so that you can open your final maximum position (Not using a Stop Loss this time) at the lowest price this way which you intend to keep for a long period of time.

Answer 8

Buffett isn't saying buy high at resistance and sell low at support. His reference to "buy when everyone is selling and sell when everyone is buying" means taking advantage of sell offs and vice versa.

Consider some other quotes of his:

Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."

If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the ‘hamburgers’ they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.

In late 2008 when stocks were down 40 percent, Buffett wanted everyone to know that he was buying. He explained that he had no idea what stocks would do over the short term, but he was betting that the market’s history of rebounding and reaching new highs over the long term would play out. At a time when selling stocks and owning cash would bring immediate (short-term) emotional relief, he was preaching by example to do just the opposite. “Equities will almost certainly outperform cash over the next decade, probably by a substantial degree.”

Answer 9

Very few follow Buffett's advice. That's why it works.

And, of course, you've got to know when "everyone" else has stopped driving the price up (or down, as the case may be) so that you can jump in and do your thing.