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?