Buy High, Sell Low

25 November 2024
Market Insights

“The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.”
John Templeton

John Templeton was one of the greatest investors who ever lived. Over the 38-year period that he managed the Templeton Growth Fund (1954 – 1992), the fund averaged a compound annual return of 16% compared to 12.3% for the world stock index over the same period. Outperformance of almost 4% per year seems good, but when you put the results in dollar terms it becomes shocking. For example, $100k invested in the Templeton Growth Fund in 1954 and held through 1992 became $28,145,151 compared to $8,211,655 for the index. With a track record like that, it would seem appropriate for investors to heed Templeton’s advice.

The quote above is one of a small collection of quotes that typically pops up with a simple google search for “Templeton’s Investing Maxims”. On the surface, it seems overly simplistic. At its core, it is just another way of saying “buy low, sell high.” Everyone knows that - from your hairdresser to your golf buddy to the annoying neighbor who corners you with a stock tip every time you take the garbage out. So, if everyone knows it, how could it possibly have been a core tenant for one of the greatest investors of all time? The answer, in our opinion, is that while “buy low, sell high” is easy to say, the history of financial markets has shown that almost nobody does it consistently. In fact, investors of all stripes, from big Wall Street firms to college kids trading on their phones, tend to do the exact opposite. While Templeton suggests that we buy low and sell high, human nature insists that we BUY HIGH, SELL LOW. Why is it so difficult to buy low and sell high? Well, when we stop and think about what that actually means, we begin to get some clarity.

Buying Low means:

Buying a stock that has dropped in price.
You or someone you know has likely lost money on that stock.
Wall Street analysts have unfavorable ratings and have lowered their target price.
The talking heads don’t like it and suggest that you sell or stay away.
It is in an unloved industry that doesn’t seem to have strong growth potential.

Selling High means:

Selling a stock that has gone up in price.
You or someone you know has made a lot of money in it.
Wall Street loves it and continually raises their price target.
The talking heads pound the table to buy it.
It is in an industry that is “changing the world”.

When put into those terms, it is much easier to understand why it is so difficult to buy low and sell high. Humans have herd-like instincts. There is safety in numbers and risk associated with standing apart from the group.

To further our point, let’s illustrate an example from the last few years. We’ll analyze the rise and fall (and potential rise again) of one of the pandemic-era favorites, Peloton Interactive, Inc. (PTON). Here is the price chart of PTON from late 2019 through a current date in November 2024:

Per the chart above, the share price of PTON was $30.60 on January 3, 2020. During COVID, it rocketed higher by over 440% in one year, reaching a high of $167.42 in January of 2021. The stock then proceeded to lose over 98% of its value bottoming out at $2.88 on August 14, 2024.

Quite a ride for PTON shareholders. At first glance, it would be easy to write this off as speculation among retail investors during COVID. Let’s look at how professional analysts on Wall Street assessed the situation. The graph below shows how Wall Street’s opinion on the stock has changed over the last five years:

Chart provided by FACTSET

Legend

Solid black line represents PTON stock price.
Dotted black line represents the average analyst’s price target.
Colored bars represent the % of analysts with a buy (green), hold (yellow) or sell (red) rating.

This graph shows that Wall Street analysts were very bullish on PTON from 2019 all the way to the peak in January 2021. At the very top, there was a total of 27 analysts following the stock. Of that group, 23 (85%) had a buy rating, 2 (7%) had a hold and 2 (7%) had a sell. Right before the stock began a precipitous decline in March 2021, the average analyst price target was $164.42.

By August of 2022 the stock had lost over 93% of its value from the high and was trading at $10.50. Even then, almost ½ (15 out of 31) of Wall Street analysts had a buy rating on the stock. An investor who bought the stock for $10.50 in August of 2022 would see more than 72% of the remaining value wiped away by August of 2024.

As the stock continued to decline, analysts finally began to throw in the towel. When PTON stock reached a low of $2.88 on August 14^th of this year, there were only 2 of the 22 remaining analysts following PTON who had it rated as a buy. The rest had a hold or sell rating.

We imagine the disillusioned PTON investor, having experienced explosive growth in 2020 only to experience the devastating decline over the last 45 months, finally selling shares as the consensus suggested, in an effort to not be left with worthless shares. Unfortunately, for our hypothetical investor, he had one more surprise in store. After reaching the low in August, shares of PTON shot up over 200% in less than three months per the chart below.

Interestingly, the number of analysts who list PTON as a buy today has doubled to 4 out of 22 from August of this year.

The point of this example is certainly not to recommend PTON stock. PTON remains uninvestable in our view as GAAP (Generally Accepted Accounting Principles) earnings are not projected to turn positive anytime in the next five years and the balance sheet is loaded with debt. The point is also not to poke fun at Wall Street analysts (although it is a little amusing to see how far off their estimates often are). Rather, our objective is to simply shine light on a pattern that has been repeated throughout financial history.

Some may argue that the PTON example is not a good representation of normal market conditions given the extremes that we’ve seen since January 2020. While we certainly appreciate the fact that nobody could have predicted many of the economic, social and geopolitical outcomes that the world has experienced, we believe investors’ propensity to buy high and sell low is in fact quite predictable and is supported by hundreds of other examples throughout history, many of which on a much larger scale than Peloton. Here are just a few important examples in the 21st century:

Examples of Buy High

Cisco Systems, Inc (CSCO)
- Date: March 24, 2000
- Share Price: $80.25
- Analyst Ratings
  - Buy: 15
  - Sell/Hold: 0
- Narrative: CSCO was the most valuable company in the world at the time. As a leading producer of networking equipment in the middle of the internet boom, CSCO could do no wrong. The company had been growing top line revenue at over 50% a year in the late 1990s. In 2000, the CEO insisted that they would continue to grow at that pace.
- Outcome: CSCO grew revenue at “only” 18% in fiscal year 2001. The stock collapsed by close to 90% to $8.60 on October 8, 2002. The share price today (11/20/24) is $56.90, still ~ 30% below the peak 24 years ago.

Toll Brothers, Inc (TOL)
- Date: July 20, 2005
- Share Price: $58.25
- Analyst Ratings
  - Buy: 9
  - Hold:5
  - Sell: 0
- Narrative: The Greenspan led Federal Reserve sparked a housing boom in the early 2000s as they lowered interest rates aggressively in an effort to help the economy recover from the tech bubble blow up in 2001 and 2002. Home builder stocks skyrocketed as revenues grew 40% + in 2004 and 2005.
- Outcome: Signs of trouble began to emerge in late 2005/early 2006. A Gallup survey in May 2006 showed that 71% of consumers believed the housing bubble would collapse in the next year, however, according to reports most “experts” believed there would be no bubble bursting on a national basis. At that time, TOL had already been cut in half dropping to $28/share, on its way to a low of $13.75 on October 3, 2011.

Bear Sterns
- Date: February 7, 2007
- Share Price: $166.44
- Analyst Ratings
  - Buy: 7
  - Hold:6
  - Sell: 0
- Narrative: Bear Sterns was a New York City-based global investment bank founded in 1923. In early 2007, the stock was valued at over $20 billion.
- Outcome: In July 2007, two large hedge funds within the bank collapsed due to large bets on mortgage-backed securities. The stock dropped by over 1/3 of its value on the news. According to a Wall Street Journal report, the CEO was reportedly at a bridge tournament when the collapse occurred, without a cellphone or email access. The collapse accelerated in late 2007 and the company was ultimately absorbed by JP Morgan Chase. The stock was trading at ~ $10/share at the time, a loss of roughly 95% from one year earlier.

NO CHART AVAILABLE FOR BEAR STERNS

Examples of Sell Low

Exxon Mobil Corp (XOM)
- Date: September 23, 2020
- Share Price: $34.39
- Analyst Ratings
  - Buy: 4
  - Hold: 18
  - Sell: 4
- Narrative: Shuttering large parts of the global economy during the COVID-19 pandemic resulted in a significant reduction in both actual energy demand and perceived future demand. XOM was aggressively reducing operations and cutting employees. There was also an accelerated push to reduce carbon emissions from fossil fuels.
- Outcome: XOM shares bottomed out at $33.42 on November 3, 2020, and then took off over the next two years to reach just under $115/share in November of 2022, representing a gain of over 240%. The stock was up over 80% in 2022 alone, a year in which the broader S&P 500 index fell by over 18%. Shares rebounded as the global economy came back online more quickly than anticipated.

Apple, Inc. (AAPL)
- Date: June 26, 2013
- Share Price: $14.22 (split adjusted)
- Analyst Ratings
  - Buy: 39
  - Hold: 13
  - Sell: 2
- Narrative: On the surface, 39 out of 54 analysts with a buy rating looks bullish. Directionally, however, the 72% buy rating was a step down for a company that had spent the prior 30 months averaging 95% of analysts with a buy rating. The stock was down ~ 40% from the recent high in October of 2012 following the death of co-founder, Steve Jobs. The concern was that innovation may have died with Mr. Jobs.
- Outcome: By November 14, 2014, the shares had doubled to $29.75. While the concerns over lack of ongoing innovation may have been well founded, Tim Cook, the new CEO, had just begun the era of borrowing at low rates to buy back company shares. From 2013 through September 2024, AAPL has spent roughly 5x the amount on share buybacks compared to what they’ve spent on capital expenditures. In total, the company has purchased roughly 40% of shares outstanding over the last eleven years.

Best Buy Co, Inc. (BBY)
- Date: December 28, 2012
- Share Price: $11.29
- Analyst Ratings
  - Buy: 1
  - Hold: 21
  - Sell: 2
- Narrative: Shares of BBY had fallen over 70% since the fall of 2010. Most people, including Wall Street analysts, thought that Amazon would continue to take share from big box retailers. There was margin compression as BBY and other retailers were forced to lower prices and offer free shipping. There were concerns over “showrooming” where customers would try a product out at a Best Buy store and then order it online for a cheaper price.
- Outcome: Much of the concerns came true. Amazon has continued to gain share over traditional retail. However, the big box retailers have fought back with ramping up online sales of their own and leveraged the advantage of physical stores to lessen the cost of shipping and allow for easier pickup. With the stock left for dead by analysts, BBY shares proceeded to rise over 290% in less than one year.

What do these historical examples have in common? On the surface, not a whole lot. Some of the stocks performed very well, some did poorly. The companies are all involved in different industries and the examples target very different macroeconomic environments. In fact, there is only one similarity that we see in all six of the examples above, which is that the consensus opinion that everyone was sure of (buy, buy, buy or sell, sell, sell) turned out to be exactly the wrong action to take at the wrong time. In these, and many other examples throughout history, investors chose to buy high and sell low.

How do we overcome this force of human nature that leads to poor investment decisions? As with most sage advice from the likes of Templeton or Buffett, the answer is simple but not easy. Here are three practical steps that we believe any investor can work on:

Study Financial History.
Be aware of our natural tendencies.
Avoid the urge to react to short-term price swings. In fact, the more severe the move is, the more important it is to resist.

Patience and discipline with the three steps listed above will put us on the path to becoming a more intelligent investor, who in the words of Ben Graham is nothing more than a “realist who sells to optimists and buys from pessimists.” Ah yes, buy low and sell high!

JPS Financial, LLC is registered as an investment adviser with the SEC and only conducts business in states where it is properly notice filed or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.

Charts do not represent the performance of the firm or any of its advisory clients and are derived from sources deemed to be reliable. All information is believed to be current and should not be viewed as investment, tax or legal advice. All expressions of opinion reflect the judgment of the authors on the date of publication and may change in response to market conditions. You should consult with a professional advisor before implementing any strategies discussed. All investments and investment strategies have the potential for profit or loss.

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