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Wednesday, April 27, 2011

How to lose money by buying low...or make money buy shorting low

In my last post http://thequantinvestor.blogspot.com/2011/04/how-to-completely-outperform-market-by.html I outlined the results of a straightforward strategy of buying any stock that was at a 52 week high and selling after a certain amount of time (no fancy stop losses or sell rules). This time I'll examine the more classic strategy of buying low...at a 52 week low to be exact. Here we'll see if buying any stock, when its at its yearly worst, can be profitable

One of my readers pointed out to me that I may have had a survivorship bias in my last analysis. This was an excellent point and to help account for that, this time, I give you the ten year performance of every stock, still listed, on the major exchanges.

NYSE - +11%
Nasdaq - + 2%
Amex - + 14%

(thanks for the input Gary, but the 'buy high' strategy still works!)

So here you go... the performance of the 'buy low' strategy for different holding periods.


1 Month Hold
                 10 Year performance       Avg. Return
 NYSE                   -79%                     -1.3%
 Nasdaq                -70%                     -0.9%
 Amex                   -62%                     -0.8%

3 Month Hold
                 10 Year performance       Avg. Return
NYSE                    -39%                     -1.2%
Nasdaq                 -62%                     -2.4%
Amex                    -75%                     -3.4%

6 Month Hold
                 10 Year performance       Avg. Return
 NYSE                   -64%                     -4.9%
 Nasdaq                -64%                     -4.9%
 Amex                   -67%                     -5.4%

12 Month Hold
                 10 Year performance       Avg. Return
 NYSE                   +30%                     2.7%
 Nasdaq                -37%                     -4.6%
 Amex                   -23%                     -2.6%

As you can see, buying any stock just because it's cheap seems to be a terrible idea (with the exception of a one year NYSE hold). On the other hand, SHORTING any stock or buying a nice put option may work out very well.

The lesson to be learned from this, and my last post, is that the common strategy of 'buy low and sell ***' should be taken with a large grain of salt. I encourage everybody to investigate what I've presented here and develop their own strategies. Money can be made...if you carefully consider what you are doing and don't just follow everybody else.

1 comment:

  1. you can improve the buy a 52 week low by simply adding a few fractals to the strategy, fractals can mark the swing high and lows after a certain period has passed and if the next fractals high>high.1 and low>low.1 buy the stock.

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