Thursday, March 6, 2014

Should you buy stocks based on its 52-week high/low?

Many people, including my own parents and friends, have bought stocks using the 52-week high/low indicator. But how useful is the indicator in determining your future returns? Based on the modified "Dogs of the Dow" method, it seems that there is some degree of success but by no means is a guarantee based on my views.

For momentum investors, the 52-week high/low can spot a useful uptrend or downtrend indicator. This method of investing where the river flows show bullishness in the trend until a reversal indicator takes place. Unless you are an experienced investor who knows how to read technical charts, you will usually ended up not better than before.


On the opposite side, we have another group of investors, including my parents and friends who know the "buy low sell high" methodology of investing. So based on the 52-week high/low, they filtered out stocks which has hit its 52-week high and buy the stocks which is near the 52-week low. This effect of anchoring is common for investors to feel that since the stock has broken its 52-week high, they can't possibly have much room to go higher and the same effect goes for stocks that has broken its 52-week low. In addition to it, since the stocks they bought are blue chip counters (SMRT, Noble, GAR), what could simply go wrong if I just hold it long enough? The problem with these group of investors is that they don't realize the main reason why a stock is going at that price is simply because of its recent and future performance expectations.

For me, I am not a technical person nor am I an expert in fundamental analysis. When I buy a stock, I seldom consider the value of its 52-week high/low. In fact, once I have identified a stock which I think will do well in the future, I will fixate at the price range I am willing to pay and accumulate upon further market weakness. 

Take my recent example accumulation of Sembcorp. I have previously blogged about how I see Sembcorp performing for the future. So when the price goes down from its peak of $5.50 (a very important resistance) to $5.25, I accumulate it further. I may be wrong about my forecast of its future performance, but I think my method has suited me just yet well so far.

What about you? How did a stock's 52-week high/low impact your buying/selling?

20 comments:

  1. For me, I also try to identify counters that I think has good growth potential based on basic FA, then decide the good price to buy based mainly on NAV. Then I look at the chart for reversal candle stick patterns and also MFI indicators. If I didn't get the "best" price I am fine since I had tried my best. Btw, i am still learning :)

    ReplyDelete
    Replies
    1. Hi aceirus

      My method is quite similar to yours looking at the fa and using the technical resistance and support as the entry and exit prices but I do not tend to use the nav. Some counters like property are all way below their nav and I suppose there are good reasons why they are still trading at below their nav after all these years.

      Delete
    2. Hi B,

      if you decided to like a company after u had done your nav, the lower the price before nav the happier i will be to snap up position ;)

      Delete
    3. oops, typed too fast sorry! ;p

      if you decided to like a company after u had done your FA, the lower the price below nav the happier i will be to snap up position ;)

      Delete
  2. It doesn't affect me at all. I purchase solely based on an assessment of a company's fundamentals and business prospects, coupled with a review of its business model, margins and competitive moat in order to determine if the valuation is fair or excessive. Investments should be made based on valuations rather than price levels.

    ReplyDelete
    Replies
    1. Hi Musicwhiz

      Assessing a company's fundamentals including their working capital balance sheets I am trained at my work so I can identify them easily but valuations are a little subjective depending on the methods you choose from. I think this is the main reason why analysts are always giving a thumb up to stocks like keppel capitaland sembcorp because they are using the sotp methods of valuation which I don't really like. I rather use the earnings or cashflow as a measure of their future valuations.

      Delete
  3. I don't know how to read FA and TA. Haven't learnt it yet. What I do is I look at the 5 year historical stock prices. Then I look at the NAV, P/B, Gearing (if it's reits), historical dividend payouts and read analyst reports and blogs about the stocks I want to buy. There are a lot of stocks that I want to buy but they are too expensive now.

    Renewed investor

    ReplyDelete
    Replies
    1. Hi Renewed Investor

      I remember when I started out I used to depend a lot on analysts report as well and their recommendation, especially if there are a few brokerage houses who are equally bullish about the stock. Now I dont quite depend on them anymore. I rather make my own projections which may or may not be the same as the analysts and then go from there.

      Some analysts are in the sell side so their recommendation can be quite stretch at times to lure buyers to come in.

      Delete
  4. Hi B,

    Thank you for the good writing. I would like to reach you if it's possible but I could not find your email. Could you email me at wilson@stokflok.com?

    Regards,
    Wilson

    ReplyDelete
    Replies
    1. Hi Wilson

      Thanks for the compliment.

      I will pm you at your email address above ;)

      Delete
  5. Personally I use the 52 week low as a filter as these tend to have low P/B and/or P/E ratio as well. Then, I try to find those who have good fundamentals (strong balance sheet, positive cash flow etc) and try to determine whether the fall in price is due to something temporary or more permanent. Frankly, everyone has different approaches to investing, just like life.

    ReplyDelete
    Replies
    1. Hi anonymous

      I think you are well versed at how you pick your investment :)

      I agree that different people hv different approaches to picking their investments but I just wanted to highlight the people who may use the 52 week high/low indicator the wrong way. I think these are mostly people who does not know much about fundamental analysis and they may see their hard earned money just blown away like that.

      Delete
  6. Hi B,

    Everyone has their own methodology and own ways of investing. As long as one makes money over it, why bother. True to say that?

    Each investor have different risk appetite, different perspective etc. So, finding the right method may not be applicable to another investor. As long as an investor understands what he is doing and adhere to his styles. Then it should be fine. Of cause sometimes luck do play a factor in it too :)

    For me, I don't see using 52weeks high/low a wrong or right method. Price level may not be the best indicator to buy/sell. After all, I feel that fundamentals of the companies is still much more important. Like what Buffett said, a good company with high price is still a bad buy.

    Cheers!
    Little Boy

    ReplyDelete
    Replies
    1. Hi Little Boy

      You are right. I agree with you that every investor has their own method of investing and as long as they are making profits it is fine. But what of they are ignorant about it, making losses and still think their method is the right one? We try to help out by providing some of our knowledge but its ultimately up to them to absorb or not.

      Delete
  7. Hi B,

    I agree with what you say about the analyst reports. That's why there are other factors that I consider before buying a stock. Also, I follow a rule that if the fundamental of the company is too hard to understand, I am unlikely to buy the stock.

    I should make an effort to learn FA and TA. I guess I have to read some books.

    Best,

    Renewed investor

    ReplyDelete
    Replies
    1. Hi Renewed Investor

      There are actually some good website to learn simple fa. Fool.sg is one of them which I quite like and they are mostly focusing on fa.

      Hope that will help you :)

      Delete
  8. Hi there,

    Using the 52 week high/low as a form of indicator to buy might be a bit narrow but I think it could serve as good reference. Of course there is a need to assess the overall fundamentals of the company. Sometimes a good company may suffer declining prices due to various reasons beyond its control.

    I am currently monitoring SMRT's price now as a matter of fact. It has reached the level that I want to enter but I am still assessing its business case.

    Regards,
    SG Wealth Builder (www.sgwealthbuilder.com)

    ReplyDelete
    Replies
    1. Hi Gerald

      Ahh ive been wanting to ask this question to an investor who is inteested in smrt and looks like you fit the bill of being able to analyse both the ta and fa side of the equation.

      Are you bullish about its business prospect in thr future years? What do you like about them that gets you noticing their stocks?

      Most of the people I ask would give me the answer that smrt is a business that will never collapse. But again going back to the objective of investing, do people want to invest to earn more money or simply just to ensure that the business wont fall down?

      Delete
    2. Haha i was tempted to buy smrt as well when it as still 1.4ish, thinking that smrt will def make profits and nvr go bankrupt.. but good thing i decided against as later i thought, with so many ppl making noise whenever they want to have fare hike, not to forget the regular train delays which will force smrt spend more money in maintenance/upgrades, would you want to put your money in something that seems to have a hard time growing their profits?

      So i agree with your last sentence, B :)

      Delete
  9. isn't it back to the wise word "be greedy when ppl fear?"
    when SMRT peak at $2 would any one disagree to get it at $0.60 when it was low?

    the fundamentals are good, I think overall it did pretty well during the last crisis.
    it's all down to market sentiment on the future prospect.
    the linkup to johor will open up a whole new market for the train services, would $1 be cheap by that time?

    I feel sad for our nation transport, as I feel they have spent money on an inferior product. SBS transit just took the latest bullet from downtown line.
    they just have to be more vigilant on the entire package and maintenance cost for any future expansion.

    surely with the ministers being paid millions, they can't be that stupid not to have come up with a fix cost to cover the maintenance over a agreed period of time, can they?

    well...

    ReplyDelete

UA-57154194-1