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My Best Advice: Buy High (and Sell Higher)

By Dr. David Eifrig, editor, Retirement Millionaire
Friday, July 21, 2017

For years, we have described the U.S. economy as "grinding higher." And many who earn their living by spinning doomsday scenarios have scoffed at us as we pitched our bullishness to all who would listen.
 
Even now, with optimism on the rise, some headlines persist in warning that the end is near...
 
But we take investing seriously, and we think you should, too. We base our decisions on what the facts are telling us, not on how we can cater to people's emotions.
 
That's why we're telling you something most folks don't know about the markets... Or if they know it, they don't want to believe it.
 
You see, buying at stock market highs tends to pay off. When the market posts higher numbers, it's not a sign of a top. It's usually a sign that the market will post higher numbers still...
 
When folks ask me for advice, my response for decades has been to quip: "Buy low and sell high." But one of the best ways to make money in the markets is to trade in almost the opposite way...
 
Buying stocks that are approaching 52-week highs often delivers better winners than other strategies.
 
What's more, new highs come in bunches...
 
We've analyzed the historical data... It turns out that if you buy the market when it hits new highs and hold for a month, you have a 91% chance of seeing it go up from there.
 
If you hold for three months, the chance of a new high rises to 97%. If you buy at market highs, your typical one-year return would be a healthy 7.9%. (All these numbers are based on the S&P 500 from 1928 to 2015.)
 
Rather than shy away from new highs, we need to realize that sometimes a great business is just that... a great business. And its rising share price is nothing to fear – it's an opportunity.
 
How can stocks near 52-week highs be undervalued? Why would investors make that error?
 
It has to do with a mental mistake people commonly make called "anchoring bias." Daniel Kahneman – the only psychologist to win a Nobel Prize in economics – first coined the term for this phenomenon. Here's an example of his idea...
 
When you provide an initial price or number to folks, their thinking gets skewed. They anchor to the old info.
 
Let's say you read two investment reports. One suggests shares of networking giant Cisco (CSCO) will rise 50% over the next 12 months, from $32 a share to $48. The other report puts the price target at $64, arguing the stock has 100% upside.
 
Investors who read the second report might hesitate to sell after Cisco rises 50%. Anchoring bias has left them feeling like the stock will climb another 50%. And if Cisco shares start to fall, anchoring bias can cause them to hold on to a losing investment.
 
It seems that humans gather any information we can as a guidepost and then base our decisions on it subconsciously.
 
This is what's at work in the 52-week-high anomaly. If a stock trading near its high announces good news, some traders will hear the news... but they won't bid up the stock as high as they might have if the stock had been lower. After all, this stock is already near its highs.
 
Not every trader does things that way. But enough of them do that it influences prices.
 
This means that stocks close to their 52-week highs don't get full credit for the quality of their businesses. And stocks near lows get too much credit because investors suspect that "they can't go any lower."
 
We're not going to suggest you go out and buy every stock that's near its highs. To begin with, we're talking about the highest-quality businesses.
 
But it's another reminder that we have to set aside our gut reactions and focus on facts. You have to set aside your emotional response to a high share price... and dig into the facts to figure out the company's real value.
 
We always start thinking about a stock by remembering it's a real business. If you buy great businesses at good prices, you'll win over the long term.
 
So don't get scared off by new highs. Stocks hit new highs because they are doing something right. If they keep doing those things, prices will keep rising.
 
Here's to our health, wealth, and a great retirement,
 
Dr. David Eifrig

Editor's note: Dave has singled out one sector that he believes is going to soar during the Trump administration... And he has told his readers about the five companies set to benefit the most from this major shift. These stocks are set to break out any day now. Get the details here.



Further Reading:

"Don't get bogged down in old data," Dave warns. When you're looking for a great investment, it's easy to get overwhelmed or caught up in biases. Learn how to focus on what matters right here: How to Escape the Trap of Knowing Too Much.
 
"You can't fake it when there's money on the line," Dave writes. Going all-in on a single prediction is dangerous. Learn the smart way to invest right here: The Real Key to Building Lasting Wealth in the Market.

Market Notes


THE BULL MARKET IN MACHINES

Today's chart highlights a company that represents the future of manufacturing...
 
The world is moving away from manual labor. A recent study showed that about half of American jobs are at risk of replacement by automation. And as robots become more sophisticated, that number is likely to grow. All this may sound worrying... But this big trend is boosting stocks that provide automated solutions.
 
For proof, we'll look to shares of the world's largest industrial-automation company, Rockwell Automation (ROK). The company provides everything from consulting services to controllers for robots. It even makes software that can manage part or all of a factory floor. Last quarter, Rockwell's sales jumped 8% – its best increase since 2012.
 
As you can see, ROK shares are already up nearly 25% this year... and recently hit a new all-time high. With the world moving towards automation, Rockwell is well positioned to grow with this trend...
 

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