Price Relativity: Buy Weakness, Sell Strength

Is Pyramid Investing possible?

There are several different ways one can look at Pyramid Investing concept and associated philosophy of trading. Since the concept is so profitable, one keeps wondering all the time (including myself) – How’s that possible? Wouldn’t everybody be applying such a concept if it really worked that well?

One of the key principles that makes Pyramid Investing possible is strict adherence to price relativity law of buying only price weakness and selling only price strength. But let’s start from the beginning.

Uninformed, nonbelievers and successful investors

The fact that not everybody applies Pyramid Investing does not invalidate the concept at all. There are at least three different groups of investors from the Pyramid Investing perspective.

Probably the major group is a group of plainly uninformed investors (or misinformed for that matter). They have no clue about existence of a concept like Pyramid Investing. They don’t even realize what they are missing.  Besides watching their account balance in red most of the time they keep wondering what’s going wrong. I used to belong to this group when I started as a young investor.

The second group is much smaller: investors who belong to this group have been informed. The problem is, they still do not believe in what they have been informed about. Since you read this blog, you can consider yourself being informed – you ARE aware that there is something called Pyramid Investing out there. Just being informed makes you well ahead of the herd. Being informed in a right way is a big step in right direction. But that alone is hardly going to make you any profits.

The last group is vastly smaller than two other groups. Investors who belong to this microscopic group are very well aware of the Pyramid Investing principles. But not only that, they are seriously convinced that Pyramid Investing is not only a viable concept, but that it is capable of making some serious profits for them. They do believe in Pyramid Investing and they know it is not just another scheme, especially not one of the scam schemes.

Investors who believe in Pyramid Investing and do apply it on a daily basis, make consistent profits that confirm their beliefs even stronger. This is one virtuous cycle. Once you start investing per Pyramid Investing principles, you become a permanent member of that small group of successful investors.

How do I become a believer?

But how do you jump over the threshold and decide to begin applying Pyramid Investing? How do you initiate that virtuous cycle?

My intention is to educate you enough so you can start applying Pyramid Investing on your own. I am sure you will permanently stick to the concept after you book your first couple of profits. Then, you will keep coming back asking for more. You will return to this blog and read every single word over again trying to extract as much information in attempt to become even better pyramid investor!

But I have to gain a little bit of your trust first, before you will even consider starting.

As I mentioned at the beginning of this article, Pyramid Investing philosophy can be looked upon in a few different ways. These ways are very similar in nature and I want to present you with one of them now. I hope it will make you think about Pyramid Investing and hopefully you will come to decision to begin applying Pyramid Investing in your own account.

Buy low, sell high (has no practical value)

We all heard for a general investing principle: Buy low, sell high. This is easier said than done. By itself, this saying means nothing or in the best case it is incomplete. The fact that you are familiar with this saying isn’t going to make you any money. The problem is you never know for sure how low is low enough and how high is high enough. The problem is you are looking for absolute low and absolute high.

Absolute lows and highs are impossible to recognize when they occur. They can be realized only after the fact but then it is too late. Even then, they can be broken. Thus searching for absolute lows and highs is impossible and futile endeavor.

Price relativity

My favorite saying is: Everything is relative. That includes low and high prices. Pyramid Investing does exactly that – it appends the “buy low, sell high” saying with relativity. In other words, Pyramid Investing will want you to trade when price is relatively low or relatively high.

$1,000 Honda Accord?

On the other hand, if I tell you: “You can buy a car for $1,000”, you will say: “It is cheap”. Cheap compared to what? Compared to a nice, fully functional, clean car that you may have in your mind, it is true. But if I say: “It’s an old clunker with a broken transmission”, you will say: “It is expensive”. So price itself means nothing. You need to know more so you can compare and make a judgment. That is relativity I am talking about.

Yet, I can further argue that you don’t need to know anything about the car! I can simply tell you this: “You can buy a car for $1,000, but this is the last one – there were hundreds of identical cars like this last one and they were all sold for $5,000 each!” Would you even think about saying “It is cheap” or would your hand already be in your wallet? Thus everything is relative.

Price weakness and strength

Similar holds for stocks. They are also sometimes relatively cheap, sometimes relatively expensive. I am not saying you don’t need to know anything about the company whose stock you intend to buy, but looking at the price only, you can tell most of the time if it is relatively low or relatively high. Certainly, knowing some history helps: Look at some stock that trades at $20 now. If that same stock traded at $10 a month ago, it would make it relatively expensive now. Conversely, if that stock traded at $40 a month ago, it would be considered relatively cheap now. Thus, once the relativity has been introduced, the same price can become relatively low or relatively high just by looking from what price level the current price comes from.

Once you introduce relativity in price domain, you are not talking anymore about low or high prices. Then, you are only talking about relatively low or relatively high prices. There are even better expressions you can use: weakness and strength:

• Price weakness stands for relatively low price
• Price strength stands for relatively high price

Thus we finally modified the well known saying “buy low, sell high” per Pyramid Investing philosophy: “buy weakness, sell strength”. Pyramids help us determine existence of price weakness and price strength so we know exactly what trade needs to be done. And it always holds the following:

• Price weakness => we are on the buy side and we never sell
• Price strength => we are on the sell side and we never buy

Breaking adherence to these two simple rules in Pyramid Investing is considered a heresy. In Pyramid Investing, we always and exclusively buy relatively low priced items that express price weakness. Conversely, we always and exclusively sell relatively high priced items that express price strength.

The addition of relativity to price label makes Pyramid Investing realistically applicable concept that WILL make you some money. Of course, there’s more to it, but I hope this clarifies the concept a little bit better and makes you believe in its viability at least one notch more.