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The Equitymaster Research Digest

Money Is Made When You Buy, Not When You Sell
Mar 8, 2017

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There's a wise saying in the world of investing: 'You make your money when you buy, not when you sell.'

It means that your purchase price is the main factor that determines your profit later. In other words, don't rely too much on the market going up.

The saying is popular among real estate investors, but it's applicable to all asset classes, including stocks.

The logic is simple enough.

Let's say stock X is in a downtrend. Two investors, A and B, have their eyes on it.

Investor A enters stock X at Rs 100.

Investor B chooses to wait. The stock falls some more. He enters a few days later at Rs 90.

A few months later, stock X has doubled. Both investors sell it on the same day at nearly the same price.

Investor B will make more money than investor A. The reason is because he bought the stock at a lower price.

But remember...he could do so only because the sellers in the market took the stock lower in the first place.

So how can we apply this practically? After all, timing the market is impossible. Right?

Not exactly...

In the stock market, buyers and sellers are in a constant battle. Neither side is completely informed about the intrinsic value the stocks they're haggling over.

Sometimes you may find sellers facing a situation that motivates them to sell stocks below their intrinsic values.

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