Discover more from Theory A : Visualize Value Investing
Buy-Low Sell-High is an Illusion
Why You Always do the Opposite
It’s basically a meme where those who try to buy-low and sell-high end up doing the opposite and buying high to sell low.
Because buying low and selling high is an idea that only works when you’re looking at a historical chart.
Every successful market transaction is an agreement between a buyer and seller. Every buyer has a reason for buying and every seller has a reason for selling.
This means that the reason for the transaction can’t be one-sided or too obvious. It’s always important to ask:
If “the price is low”, then why would the seller sell?
If the “the price is high”, why would the buyer buy?
Retail Investors are Price Insensitive
Many retail investors tend to buy-high and sell-low because they get their primary information from social sources like Twitter, Reddit, Discord, TikTok, etc…
These platforms are driven by virality and momentum.
Since viral news spreads exponentially, by the time a meme has become a “Thing”, it is already far removed from the source where it spread.
Put plainly, most people follow the fashion. They will always be behind and always feel like they are catching up to whatever is hot and new because that’s the kind of information they consume.
This style of investing is fashion of fundamentals. If NVDA or SHIBA is cool, then they have to buy it. If it’s not cool, then they have to sell it.
At no point is price a consideration. If someone has $100 dollars and wants to own a piece of what’s cool, it doesn’t matter if the seller is selling 10 for $10 each, 5 for $20 each, for 1 for $100.
The most important piece of information for this price insensitive buyer isn’t that there is a 10x range here but that $100 can buy at least one.
This is likely why prices for stocks go up suddenly when they become memes. Just like luxury bags and watches, stocks are temporarily elevated into status symbols.
Every owner of the meme stock knows that what they’re holding now is hot and viral, so they mark up their prices.
Time Horizon Mismatch
A Taylor Swift concert ticket is worth almost nothing once the concert is over.
Viral information causes buyers and sellers to go to the market in waves. Like concerts, this creates drastically different prices based on whether or not you are buying/selling before, during, or after the wave.
During a volatile period of activity, many traders, like ticket scalpers, try to front-run the expected wave. They’re willing to buy at high prices if it means selling them at even higher prices to even more price-insensitive buyers.
Traders take on risk because there may not be a next wave. They end up “bag-holding”.
To reduce this risk, many large institutions engage in “Payment for Order Flow” where brokerage apps like Robinhood are paid for send their customer orders over. This allows institutional traders to distinguish between “smart flows” that are actively looking for good deals and “dumb flows” that are price insensitive.
These waves create highly volatile periods of transactions where much of the buying and selling is done by either by price insensitive meme followers, or shark-scalpers looking to buy-high and sell-higher using insider information on market flows.
It doesn’t mean you can’t make money of this activity, but it’s ill-suited for buying and holding for the long term.
A Test of Courage
Investors who think “Stock investing is easy, I’ll just buy low and sell high” and end up doing the opposite are actually following their strategy in a way.
It’s just that they rely on memes to get their information and so are always late. They are manipulated by fashion in their desire to get ahead of it.
They don’t buy because they have a viewpoint about the world that they want to express by putting their money where their mouth is.
They are instead driven by fear of being left behind.