Barry Ritholtz is saying "Never buy a stock making a 52 week low" . Anyone who makes such absolute statements does not understand markets. There is an overwhelming statistical evidence to show there is a clear edge in buying weakness.
I have tested several systems which show significant edge when you buy weakness. The fundamental principle is that markets are mean reverting and markets tend to over react on short side.
Never blindly follow anyone who makes such absolute claims. Test the validity of any market related claims.
1 comment:
Its not the lows, but what they mean: That advice for individuals not to buy stocks making 52 week lows is for a wide variety of reasons -- these stocks are:
• are often in a down trend
• part of a negative sector or group
• have fundamentals that may be decaying
• possibly in markets that may be in a confirmed bear
The 52 week low data point is usually a manifestation of these other issues;
If you are a sophisticated invetor/market professional/experienced trader, this kind of absolute is not aimed for you. But for most investors, its better to miss that first 5-10% move off of the bottom and wait until a trend is re-established.
Consider HP: It had quite a few false bottoms and fake reversals -- but you could have picked it up in early 2005 ~$20 and watched it gain 50%. No, you didn't bottom tick it. But it had good upside with only modest risk.
Think of how much damage investors bottom fishing the likes of AOL, CSCO, EMC, DELL, INTC, LU MSFT, SUNW, NT, QCOM, YHOO, etc. did to themselves.
Never say never, but for most retail investors (and quite a few funds) they may been better off saying "extremely rarely."
Post a Comment