Sell Low, Buy Lower = Profit?

Discussion in 'Share Investing Strategies, Theories & Education' started by MangoMadness, 1st Apr, 2020.

Join Australia's most dynamic and respected property investment community
  1. MangoMadness

    MangoMadness Well-Known Member

    Joined:
    20th Feb, 2020
    Posts:
    99
    Location:
    Adelaide
    As a new investor I just wanted to put something on the table and ask if I am thinking straight or if my thinking is skewed.

    Lets say on the 1st Nov Stock A and Stock B were both trading at $1 each. I decide to buy $1000 of stock A as I think they have better prospects than stock B.

    Fast forward 5 months and Stock A is trading at 60c and Stock B is trading at 50c. In this time Stock A's future is very grim and stock B looks to be a better long term prospect.

    So I sell Stock A and incur a 40% loss (-$400) and buy stock B at a 50% discount to the price on Nov 1 ($600 of .50c shares = 1200).

    I have now gained 20% more shares in stock B than I would have had if I had bought them on the 1st of Nov (1200 vs 1000)

    Overall I see this as a win situation:
    : 1200 shares in the better company (opinion)
    : $400 tax loss to offset a gain

    Am I thinking correct? Buying low and selling high is great but maybe selling low and buying lower can also be a 'gain'?

    Thanks for reading!
     
  2. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    4,086
    Location:
    Australia
    All of this requires you to have an accurate view of value.

    in other words you are buying what you think has the best gains. But that only works if you are right.

    company b may go bankrupt whatever your opinion.
     
    Greedo, MangoMadness and Biggbird like this.
  3. iloveqld

    iloveqld Well-Known Member

    Joined:
    11th Jan, 2017
    Posts:
    321
    Location:
    Brisbane
    I am a newbie as well, so just put my way of doing.

    If I am 100% sure (which I never got that), I will do it as long as you take your current FY income into accounts because you can claim tax on those lost.
     
  4. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    4,086
    Location:
    Australia
    Dont try to do your own tax returns.
     
    CheckMate likes this.
  5. Silverson

    Silverson Well-Known Member

    Joined:
    11th Jun, 2016
    Posts:
    634
    Location:
    Melbourne
    What if the stock you sold rallies and the one you bought into now drops? All this sounds a lot like market timing to me.
    If the above happens you may not have any gains to offset the loss against.
    I’m talking from experience, although I’ve never sold a stock I know why you put the dogs in the bottom drawer, if you put them in the top it would collapse under the weight haha.
    But again just my unedumacated opinion, if you do end up doing the above maybe post the results over a few trades/period of time and share your findings, a pc research thread if you will.
    Also cgt usually is a result of a win, it’s not the worst problem to have, generally means your making $$
     
    iloveqld likes this.
  6. CheckMate

    CheckMate Well-Known Member

    Joined:
    4th Dec, 2015
    Posts:
    63
    Location:
    Sydney
    You can't offset your income with capital losses. Please gain more information about it or consult with tax professional.
     
    Archaon likes this.
  7. iloveqld

    iloveqld Well-Known Member

    Joined:
    11th Jan, 2017
    Posts:
    321
    Location:
    Brisbane
    Yeah, I have my accountant doing that. We have investment properties, we have negative gearing, we have new builds, we have subdivisions, there are many things to take into accounts. Just saying, if you know one is up, and one is down, do it. But usually, nobody knows for sure :D
     
    CheckMate likes this.
  8. Big A

    Big A Well-Known Member

    Joined:
    18th Nov, 2018
    Posts:
    1,123
    Location:
    Australia
    No disrespect to anyone but some of the stuff I am reading on here is really worrying.
    A lot of people with little experience and understanding trying or wanting to try strategies that I reckon most professional investors would consider higher than average on the risk curve.

    Everyone wants to find a get rich quick scheme. I don't believe the stock market will be that for most people. While some might make a quick dollar from the market most will lose a quick dollar playing with these sort of strategies.

    I look at investing in shares as a long term fairly slow money making process. I say slow but still fairly reasonable pace for me anyway. The more you try and speed up that money making process the more you have to take on risk. That risk could pay off or just as likely leave you poorer.

    As long as you recognize that, then by all means have a crack. Just don't blame the stock market when you lose. Blame yourself for playing a high stakes game.
     
    Player, MangoMadness, sharon and 4 others like this.
  9. SatayKing

    SatayKing Well-Known Member

    Joined:
    20th Sep, 2017
    Posts:
    5,004
    Location:
    It is still all about ME!
    So. You love the thrill of speculating and wish to increase the odds?

    Very interesting.
     
    Finn Irving, sharon and Silverson like this.
  10. PandS

    PandS Well-Known Member

    Joined:
    14th Feb, 2017
    Posts:
    1,158
    Location:
    NSW
    Firstly market don't sell better prospect stocks at a discount to grim stock
    in your example, it is a rare case that stock A can trade at a discount to Stock B

    The market always sell down grim stock B and support better prospect stock A unless you think you know better than thousands of participants in the market

    So to the market, if stock A is trading at 60c and stock B at 50c, Market think stocks A has much better future.

    Sell high buy low, shorting the stock is the way to go but that has risk just like buying long stock that can go down
     
    Last edited: 1st Apr, 2020
  11. Fargo

    Fargo Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    1,045
    Location:
    Vic
    Mango, You are spot on. You will go a long way, very few investors grasp this concept. it has proven very profitable in the last 2 weeks. If you can begin investing and understand the concept of anchoring you are already way ahead of the curve. I hope you also understand the difference between noise, and what is, and ignore the crescendo. Dont listen to the noise that discourages you. Everday think of where the best place for your money is tommorrow. What would you buy to-day? would buy your current holding to-day ? Look forward dont look back, what you paid yesterday is irrelevant. If you think something is near inflection point, of course it may be better to jump in if its prospects are better than a current holding that may have moved further from inflection point. The market is not rational . Go with your highest conviction, that way you sleep better.
     
  12. MangoMadness

    MangoMadness Well-Known Member

    Joined:
    20th Feb, 2020
    Posts:
    99
    Location:
    Adelaide
    Thank you for all of your replies, it has been an interesting mental exercise.

    I will give a real world example of this situation that I was debating last night.

    In my super I had 40% International Shares and 20% International Hedged. Since 1 Jan 2020 the International Hedged has dropped 24% and International Shares only 10%.

    As historical data shows that the current USD/AUD exchange rate (around 60c) is near the low end of the long term cycle should I change my allotments to take advantage of the 10% drop in unit price and convert them into the lower 24% unit price?

    Effectively 'gaining' extra units by selling units at a 10% discount to buy units at a 24% discount on the premise that over the long term the USD/AUD exchange rate will move higher.

    Is there risk? Sure, maybe the AUD will drop past 60c and remain there for the next 20+ years and I will miss out on the currency unhedged returns. But we never know the future, surely we can only use historical predictors and data to make informed decisions about the probabilities of future outcomes?
     
  13. Omnidragon

    Omnidragon Well-Known Member

    Joined:
    17th Oct, 2015
    Posts:
    1,532
    Location:
    Victoria
    You're probably better of understanding the fundamentals of why you're buying, and start buying incrementally when it hits the price for which valuation seems cheap.
     
    MangoMadness and iloveqld like this.
  14. blob2004

    blob2004 Well-Known Member

    Joined:
    6th Jun, 2018
    Posts:
    120
    Location:
    Brisbane
    IMO you need to get the timing of currency right TWICE in order to benefit from it.

    So, let's say you buy hedged now and benefit from the theoretical rise in AUD for the next 10 years. You would then need to sell out and buy unhedged when currency reaches a top. Can you do that?

    If you don't time to sell out correctly, and the currency trends down once more, you will be making a lower return being in hedged rather than unhedged, and everything evens out (probably costing you more by hedging and transacting as well).

    Hope this makes sense.
     
  15. MangoMadness

    MangoMadness Well-Known Member

    Joined:
    20th Feb, 2020
    Posts:
    99
    Location:
    Adelaide
    Thank you for your reply.

    The way I see it, if the average long term currency trend is between 70c-80c (ballpark round numbers) vs USD then if the current exchange rate is +/- 15% of that range then the long term (10+ years) chances of the rate returning to that average is very high.

    So if the rate changes to 60c then changing to hedged will give me a gain if it returns to those numbers. If the rate goes higher to 95c then the long term play is to flip back to unhedged. I might even go back at a lower exchange rate pending time to retirement to 'cash in' that increase. Something to consider in the future.

    I would agree to that statement if I was starting out at the average position (70c-80c), but as I am starting on (what I believe) the low end of the scale, any movement back toward the average is a gain. Yes it might go to 80c and then back to 70c and flip flop for awhile but I would still have gained position as long as the rate stays above 60c.

    You have however raised an interesting point in regards to "new" money. It is all well and good to flip current invested money but what about a superannuation payment at 70c or 80c or 85c. this new money hasn't benefited from the currency gain. Luckily my super allows me to allocate current money and new money separately.

    You also mention investment costs. The cost for hedged and unhedged investment types are the same for sunsuper.

    I hope that I have understood your concerns and answered them in a logical way :)
     
  16. MB18

    MB18 Well-Known Member

    Joined:
    25th Sep, 2018
    Posts:
    155
    Location:
    NT
    MangoMadness likes this.
  17. Zenith Chaos

    Zenith Chaos Well-Known Member

    Joined:
    10th Jul, 2015
    Posts:
    1,347
    Location:
    Sydney
    Tax offset - yes, but only against a capital gain, not your PAYG income. I did something similar selling BKI and buying VAS. BKI was at a premium to NTA, had fallen less from its 52 week high than VAS, and I was looking for an opportunity to get rid of BKI for awhile now and one preferred instrument is VAS. I did these things simultaneously as I didn't want to predict what the market was doing, although VAS went down a bit, so I guess I made even more on the deal.
     
  18. Zenith Chaos

    Zenith Chaos Well-Known Member

    Joined:
    10th Jul, 2015
    Posts:
    1,347
    Location:
    Sydney
    We may be in a similar situation. I'm in Sunsuper and rebalanced in a similar way and followed a similar strategy for my personal trust bucket; partly for the tax loss, partly because I thought VGAD was better value because of currency. You may, however, want to consider the tax implications and overheads of buying and selling (next time you sell VGAD, you'll be up for CGT). My plan is to get back to my original asset allocation (yours was 40% International Shares and 20% International Hedged) by inflows, rather than balancing events - i.e. I will keep buying VGS until I'm rebalanced.

    Alternatively, a dynamic asset allocation based on the AUD/USD exchange rate may be worthwhile, e.g.
    > when $1 AUD - 50 cents USD (or less), then 100%VGAD,
    > when they are at parity (or AUD > USD), then 100% VGS.
    > anywhere in between use linear pro-rata formula (0.75 would be 50/50).
     
  19. Omnidragon

    Omnidragon Well-Known Member

    Joined:
    17th Oct, 2015
    Posts:
    1,532
    Location:
    Victoria
    Short them then get into the capital raising to cover your short. Same same