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

Chapter 12The Importance of Embracing a Trailing 12-Month Return of −25 Percent

Jacobian Inverse: I want to seek out a portfolio of 25 businesses whose trailing 12-month returns are beyond great. Even though I did not participate in any of the prior performance, I want to put my principal into such a strategy. I want to err on the side of investing that gives me a higher probability that I am buying high. Why would anyone want to buy a business that is trading for less right now than it did in its recent past?

I know the preceding paragraph sounds absurd, but this is the reality of the investing public and even most professionals. When you realize how ridiculous the mindset sounds, you realize that you want to welcome the fact that the companies you have identified to be in the strategy are trading much lower or substantially lower now than they did over the past 12 months.

Howard Marks said this:

The thing I find most interesting about investing is how paradoxical it is: how often the things that seem most obvious—on which everyone agrees—turn out not to be true. . . . The ultimately most profitable investment actions are by definition contrarian: you’re buying when everyone else is selling (and the price is thus low) or you’re selling when everyoneelse is buying (and the price is high).¹

This brings us to the reality of when you are resetting or establishing your own 52-Week Low strategy or, with the help of your adviser, realize—in fact, welcome—the fact that the trailing ...