Those of us who spend some time reading (and blogging) on the subject of investments have all seen articles or forum posts from people who have sold a stock only to buy it back after its share price has fallen to some lower valuation.

Some investors claim to have done so repeatedly with the same stock. If you could get the timing right, you should be able to generate significant returns over time. But, is a sell-buyback strategy really making money for those investors?

This article presents the limitations of the sell-buyback strategy and provides some income tax considerations for those employing the strategy.

The Sell-Buyback Strategy

A sell-buyback strategy is relatively straight forward to implement. For example, an investor buys a stock at $45 per share, sells it at $65 per share with the intention, or at least the hope, of being able to buy it back at a lower price on the next dip or correction.

If such a strategy could be implemented, the advantage is obvious. The ability to generate a 30-40% profit once or twice a year by buying and selling the same equity would create quite a following of investors. The reality is, of course, it’s not that easy to accomplish. Let’s take a look at the challenges and limitations of implementing a sell-buyback strategy in the real world.

One of the most obvious challenges to implementing the strategy is accurately predicting the future trajectory of a stock holding. I’ve yet to find anyone who can reliably pull that off, and I know for certain that I cannot predict the future. One of the many things I’ve learned over the 30+ years I’ve been investing is that, because there are so many variables and unknowns that can drive the equity markets, the short term direction of any particular stock holding is impossible to predict.

I had a recent reminder of this lesson with Realty Income (O). I bought into Realty Income at $45.25 in September 2015 and watched it run up to $62.50 by March 2016.