Buy Low, Sell High

Kind of like the weather, everyone talks about buying low and selling high, but no-one does it, at least according to a Bloomberg columnist. Then again, some people, like my friend Barry Ritholtz, argue that you should avoid stocks selling at low prices — like those at 52-week lows. The relentlessly empirical James Altucher takes Barry to task on that point, and demonstrates that buying at 52-week lows can work, sort of:

I took all Nasdaq 100 stocks since 1996,
including stocks that have been deleted from the index (to avoid
survivorship bias). What happens if you buy stocks hitting 52-week lows
that are trading for greater than $5 (avoiding penny stocks) and sell
them one quarter later?

The results actually demonstrate that, over this period, the odds
were on your side to outperform the market if you bought stocks at
52-week lows. The average return per trade was 7.34% (over 662 trades),
including wins and losses. This far outperforms the average return per
quarter of the Nasdaq during this period of 2.6%.

Some 60% of the trades turned out favorably and 40% were failures.

Related posts:

  1. S&P’s Swinging Prices
  2. What’s Next for Nasdaq?
  3. Technology as Affliction
  4. Nasdaq Goes Full Circle
  5. HDTV => High Def Tele Vision

Comments

  1. buy52weeklow says:

    I’ve always found Barry far to dogmatic on these trading heuristics. In fact I’ve often found doing the opposite of trading heuristics a good place to start when looking for investment ideas. I did much the same analysis and found similar results. I’ve actually supplemented my investment program with this very approach with good results. Although after James’ analysis I’m wondering if everyone will be doing it now :)

  2. AdamD says:

    Wouldn’t it help you if everybody did it? I thought that’s why those wackos are sending out emails pimping cheap stocks?
    It’s hard to argue with a decade of data, but my gut tells me that buying a troubled stock on speculation could end up putting *me* at a 52 week low.

  3. BDG123 says:

    Barry’s commentary is usually well thought out and worthy of merit BUT value stocks significantly outperform any other equity asset class over the past forty years. Those stocks are likely closer to 52 week lows than 52 week highs in many situations. The reality is it depends. You simply cannot make a valid investment decision using one data point, ie 52 week lows. Do you buy your clothes on sale or would you prefer to pay full price? Are they any less of a quality purchase on sale? You know, if you are patient enough, you’ll get the clothes you want at a 52 week low. In the end would you rather pay up or pay down?
    So, for the buy and hold crowd, of which I am not one, buying 52 week lows makes more sense than buying 52 week highs as long as you are loading up on quality stocks. ie, S&P 500, etc. If you are buying Hansen Natural, well, you get what you pay for.
    Remember, oil stocks were all 52 week lows until they were all 52 week highs. Anyone wish they could go back and buy some Valero at a 52 week low of $5 before it went to nearly $80 in three years?
    While I won’t go into the laborious detail, there is a methodology used to buy beaten down stocks which will outperform the markets and, likely, outperform Barry long term.

  4. BDG123: I was with you right up until the end, when you made that comment about having a working methodology for beaten-down stocks. It reminded me of Pierre de Fermat’s famous comment on his last theorem in the margin of his copy of Diophantus’s Arithmetica:

    I have discovered a truly remarkable proof which this margin is too small to contain.

  5. Dutch says:

    the answer, of course, is that you are just “buying beta.”

  6. BDG123 says:

    Does that mean you shop at The Gap too? lol. Lot’s of sales lately with their patheticly overpaid, underperforming CEO.
    I shuddered when you compared me to a Frenchman. I would prefer a comparison to Laurent Fignon, Bernard Hinault or Marquis de Lafayette if you must.

  7. Nitin says:

    The problem with the adage Buy Low, Sell high is it is difficult to figure out what low is. Was Enron low at 50, 30 or 0. We in Canada had the same experience with Nortel. It’s like catching falling knives. I still prefer Buy High, Sell Higher.

  8. I was surprised by James’ study showing how successful buying stocks making 52-week lows could be. It was totally contradictory to all of my trading experience, as well as a variety of studies I’ve read.
    So I reviewed his analysis further. My conclusion: James created a very interesting stock screener — one that apparently outperforms the broader markets — but he failed to address the key issue. That was (and remains) that overall, buying stocks making 52-week lows is a bad strategy.
    Further, upon closer review, I discovered his approach has lots of analytical issues and statistical errors. Consider:
    1) In James analysis, he is making but one 52-week-low buy per quarter — his model buys at the first 52-week low, and then sells three months later. All of the subsequent 52-week lows between the buy and the sell over the next 90 days don’t get bought in his study. In other words, his test ignores most of the 52-week-lows in a quarter.
    2) Weak relative strength has never been shown to be a winning strategy — but that is what 52-week lows actually are. James O’Shaughnessy, in his 1996 book “What Works on Wall Street,” showed that buying the weakest relative strength stocks was one of the worst of all strategies. “If you’re looking for the perfect way to underperform the market, look no further than buying stocks with the worst one-year price performance,” O’Shaughnessy wrote.
    3) Selecting the Nasdaq 100 biases the study. Consider the Wilshire 5000, or the Russell 2000 stocks for a broader data set. In fact, O’Shaughnessy showed that as bad as buying weak relative-strength big-cap stocks was, buying weak relative-strength small-cap stocks was an even bigger disaster.
    4) The survivorship bias of the Nasdaq 100 far exceeds that of the broader market. There were far less bankruptcies and delistings in the 100 than there were in the broader universe of publicly traded stocks.
    5) Even more selection bias: Maintaining a $5 threshold. Doing so eliminates most of the stocks that go bankrupt or get delisted. (most stocks that go belly up or get kicked off an exchange invariably work their way through the $5 level toward zero).
    6) The 1996 to 2006 time frame is, to say the least, an aberrational one in history, thanks to the bubble top and crash. How does this strategy work between, say 1950-2000 or 1906-2006? The O’Shaughnessy study covered Standard & Poor’s Compustat database from 1951-1994, covering 6,800 stocks.
    ~~~
    By limiting his screen to as little as 2% of the potential 52-week lows, 0.01% of the eligible equities, less than 5% of the past two centuries history, the study failed to disprove much of anything.
    ~~~
    Buying weak relative strength stocks — and stocks making 52-week lows are among the weakest — has long been an overall money-losing strategy. I await a more comprehensive analysis showing something different.