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

Chapter 11Filter 5: The 52-Week Low Formula and My Journey Trying to Disprove It

Jacobian Inverse: If I want to ensure that I minimize my likely return on an investment, I will focus on buying stocks that are trading at their 52-Week Highs. I will identify the stocks in highest demand and join the surplus of buyers clamoring for shares. I will put a lot of money into a stock in the hopes of incremental—or possibly negative—gains. I will buy high and hope for slightly higher, even at the risk of selling low.

The fifth and final filter of the 52-Week Low strategy is designed to identify companies trading below their historic and recent high prices, companies with more sellers than buyers. Buying low and selling high is Economics 101 thinking, but it constantly amazes me how often this cardinal and basic rule is overlooked or that breaking it is so easily justified by investors and firms.

The fact that this simple rule is so often broken reveals how cognitive biases and emotional influences work against our better judgment when it comes to investing. We see a company’s stock rising and we get a sense that we should be investing in it. We watch it rise, we watch people making money, and we want a piece of the action. We see Apple setting new company records and our knee-jerk reaction is to invest. We justify our actions. Everyone else seems to be making money there, so we can make money there. We see week after week of gains and believe this is the right time. We buy. It will continue ...