"Cheap stocks stay cheap" - Really

I saw this post over at 'Filtering Wall Street' which Trader Mike had in his links.

There is a reason why cheap stocks are cheap stocks – nobody wants them. And for every AAPL there are 2209 others that languish on the sidelines waiting to be called – like the little kid at the sandlot ball game.

For those of you who suffer from attention deficit disorder, AAPL sold for less than 9 bucks just 3 and a half years ago. And the number “2209” is not made up either – that happens to be the number of stocks selling between 1 and 9 dollars yesterday. And for each of those 2209 stocks there is one hell of a story. Believe me – I’ve heard most of them.

Now take a close look at this chart of AAPL that I have laboriously annotated for your viewing pleasure. Soak in the many lessons to be found on the chart. It is a cheap stock clinic. If you see similar set-ups on the monthly basis in your favorite cheap stock you can be pretty certain that it isn’t going to stay cheap for long. But if you are buying because it’s an “idea” stock (as in - I have an “idea”) you better be using “mad money.”

When anyone makes such an assertion, you should examine it to see if it is true. There are number of such misconceptions in trading. They get passed on from one trader to another and no one questions the scientific logic behind it. Even famous traders like William O'Neil makes such an assertion.

What is the hypothesis behind that statement.A stock price growth is a function of its price.The statistics quoted is wrong. Price growth and trend is not a function of stock price.You must examine your biases before you make such absolute statements. Worse you might be missing out on profitable opportunities because of your wrong assumptions.

If you do research properly, you will find lower price shares have higher leverage because they tend to be mispriced more. There are several studies which show this. As soon as I put up the list of stock below 5 yesterday, one gentleman wrote why are you wasting your time on stocks below 5. Such ignorance is good because it creates opportunities for those who question such assumptions.

Even in the IBD methodologies, their insistence on stocks above 15 leads them to missing out on ideal breakout points, which in several cases are below 15.

If the logic of "Cheap stocks stay cheap" is correct then you should just buy Berkshire Hathway.