The 52-Week Low Formula: A Contrarian Strategy that Lowers Risk, Beats the Market, and Overcomes Human Emotion

Chapter 1The 52-Week Formula

Invert, always invert.

—Carl Gustav Jacob Jacobi

Inversion. Such a simple concept. If you have a problem to solve, consider all the solutions that won’t work and, in so doing, the correct answer reveals itself. When I first came across the preceding quote from nineteenth-century German mathematician Carl Gustav Jacob Jacobi, it resonated. This way of thinking—in reverse—seemed to speak to the way I made decisions. Want to lose weight? Think of all the things that will make you fat and do the reverse. Want to be a better father? Think of the things that would turn your kids away. And Jacobi’s maxim seemed most appropriate to my career in finance, particularly as it relates to investing’s golden rule:

1. Buy low, sell high.

It’s the cardinal rule of investing and, often, the most overused, underfollowed principle in the world of finance. Too often, investors do just the opposite—they buy a hot stock hoping it will get hotter and end up riding the downward slope toward a loss. These people are driven by the idea of a quick return, a profit that appeals to their sense of winning but defies logic and overwhelms their discipline.

If they aren’t chasing stocks bound to lose, they invest in what they know: the path of least resistance. They rely on instinct, intuition, a familiar path, or wishful thinking, rather than doing the necessary work. And, as we’ve seen in books like Unthinking and Thinking, Fast and Slow, cognitive ease can be a powerful force. ...