Each and every investor has their own strategy, their own long-term goal and their own idea of what makes a good investment. We can specialise in specific areas, look for short-term profits or invest for the longer term. The key to long-term success in the stock market is an ability to listen to the markets and understand what it is saying. So, where do you start?
52 week highs and lows
The key to a long-term successful strategy is to keep everything simple and remain focused on your long-term goal. This is why many investors look at the 52-week highs and lows of stocks to see which ones are hitting new highs and which ones are hitting new lows. Why is this important?
As we have mentioned on numerous occasions, if you think of the stock market as an information exchange where different views, public and non-public, come together to create a consensus you will not go far wrong. If a share price is hitting a new 52 week high for no apparent reason then there must be something going on behind-the-scenes. On the flipside, if a share price is falling to new lows with no obvious reason, again there might be something going on behind-the-scenes.
Don’t fight the market
If we are honest, we will all have experienced situations where we believed we knew better than the market, where for example a share price was falling but we believed it still offered good value. As the price continues to fall so we continue to increase our exposure only for some unexpected announcement to confirm the market’s worst fears. Some will argue that unexplained highs and unexplained lows are the result of inside information and in some circumstances they would be correct. However, as much as the regulators would like to believe the legal and investment worlds are “watertight”, information does leak out on a regular basis.
Prompt further investigation
There will be many occasions where simply following shares hitting 52-week highs will bring about significant returns in the short, medium and longer term, but you should always know what you are investing in. Therefore, before you blindly follow momentum in the marketplace do your research, try to understand what might be going on and know what you are buying. The problem with those who invest blind is that they will never really know the “fair value” of a share price because they will never understand the company.
The same can be said of shares hitting 52-week lows and the sometimes uncomfortable decision to bank a loss and move on. Human nature often dictates that we have egos the size of the sun and taking a loss even though our research “was right” can be difficult. Hands up, how many of us have shares which we should have sold a long time ago at a significantly higher price? Now they have fallen too far to sell now? Have they really fallen too far? Are you sure you couldn’t make better use of the reduced funds elsewhere?