Filed under: Stock Picks, Investing Basics, Stocks, Historical Stock Prices, Investing
The desire to buy things for as cheap a price as we can is natural. It's a concept we start learning practically as soon we begin to reason -- always look for a deal. So it doesn't matter if we're contemplating the purchase of a flat-screen TV, a new car or a house, or a stock, we want to get the best bargain possible -- and at the very least, avoid "overpaying."
But this mindset turns out to be at odds with the dynamics of the stock market -- and often causes investors to avoid buying the best companies.
Stocks Aren't Wasting Assets
When you go into a store to buy a product, in almost all cases it is a "wasting asset." Over time, wear and tear -- as well as the introduction of newer models -- conspire to make the product less and less valuable, and thus less desirable. That's why Craigslist and garage sales exist - to get rid of items that once were more valuable then they currently are.
But in the stock market the goal is to buy an asset -- in the form of a share of stock -- that will hopefully be in more demand in the future and garner us a high price than we paid for it. And the 52-week high list is the perfect place to look for those type of stocks.
"It doesn't matter how smart you are; how ingenious you investing idea is," says Ivaylo Ivanhoff, chief strategist for Social Leverage 50, which selects and ranks stocks in the early stages of their price growth cycle. "Until the market agrees with you, you won't make a cent. And the market agrees with you when you see your stocks on the 52-week high list."
Those sentiments seem to be backed up not only by math, but by common sense as well.
Apple for $4
For example, at the end of 2004, Apple (AAPL) was trading around $4 a share on a split-adjusted basis -- which was not only a 52-week high, but an all-time high -- and had gone up 300 percent in the previous year alone. To many, this was a sign the stock was too expensive.
But before a stock can go up 5,000 percent -- like Apple did between 2004 and 2014 -- it first has to go up 50 percent. And then 100 percent. And then 200 percent. And so on. And each time it does, chances are it is hitting 52-week highs.
"The 52-week high list is basically a short-cut into the minds of people, who can create and sustain trends," says Ivanhoff, referring to the large institutions who can move markets and individual stocks with their investments.
History shows that once a major move begins, it can continue for a long time. Look at the charts of widely held blue chip stocks like Microsoft (MSFT), McDonald's (MCD), Walmart (WMT) and Home Depot (HD), or even lesser-known names like Taser (TASR), Monster Beverage (MNST), Baidu (BIDU) and Pharmacyclics (PCYC). During their most explosive price appreciation periods, they were consistently showing up on the 52-week high list, sometimes for years on end.
The Strong Get Stronger
In the stock market the general rule -- no matter how counter-intuitive it seems to investors -- is "the strong get stronger," and those stocks that will continue to get stronger cannot do so without showing up on the 52-week high list.
Because of this phenomenon, investors would be wise to forget about finding under-performing "bargain" stocks that might someday be winners and instead concentrate on stocks that are already winners and will continue to be.
As Ivanhoff is fond of saying when it comes to stock picking, "Stop trying to find the next Starbucks (SBUX). Starbucks might be the next Starbucks."
Brian Lund has developed a list of "20 Books Every Investor Should Know About."
