Why “Buying Low” Might Not Always Work

As one saying goes, investors have to “buy low and sell high” when it comes to investing. The act of “buying low” would seem to suggest that you shouldn’t add to shares of a company at a higher price from what you previously paid for. Although the approach sounds reasonable, there is actually more than meets the eye when it comes to its practical application.

Focus on value points, not share price

Allow me to explain further. Let’s take the example of health-care services provider, Raffles Medical Group Ltd. (SGX: R01). You can read up more about the company here.

The table below (click for a larger view) captures a couple of things over the past four years: 1) The company’s share price on the day its year-end financial report is released; and 2) the valuation of the company’s shares on those dates as measured by the price/earnings (PE) ratio and the dividend yield. The objective of the table is to give us some perspective on how the valuation and share price has changed over the past four years.

Raffles Medical's table of financials

Source: Company Earnings Report

From the table above, the Foolish investor would have noticed that the share price of $3.31 for Raffles Medical on 24 February 2014 was 53.2% higher than its share price on 21 February 2011. Furthermore, the astute Foolish investor would have noticed that although the share price was much higher, the value of the shares, as measured by the PE ratio, was actually better.

What this means is that an investor could have bought shares on 24 February 2014 and be paying a higher share price; but at the same time that investor would be getting a better value point (in other words, more bang for his buck) when compared to the value point of the shares four years earlier.

A Fool’s take

The exercise above is to show investors that there might be times when we pay a higher share price but yet get better value. This point is important, especially if you have ever found yourself not adding to your own winning companies which have performed well over time. That’s because adding to your winners may turn out to be a better approach than attempting to “buy low” on another mediocre or lousy company.

Said another way, when it comes to investing, it’s sometimes not as easy as just “buying low”.

There are caveats to paying a higher share price of course. It might seem to make sense in Raffles Medical’s case because investors are getting better value on 24 February 2014 as compared to 21 February 2011. But at the same time, the assumption is that the company’s business would perform at the same level or even better as it has in the past. It is the onus of the company to do just that.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.