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.