“I’m scared. My stock just hit a record high. I’ve got to get out while I can…”
Clients said that to me regularly when I started out as a broker a few decades ago.
Everyone seems to get scared when their stocks hit new highs, and they want to sell… but that is the WRONG way to think.
The truth is, new highs are a GOOD thing…
[ad#Google Adsense 336×280-IA]History is clear on this one.
You want to get rid of stocks hitting new lows.
And you want to keep ones hitting new highs.
Too bad everyone wants to do the opposite.
Look, if your stock is at new highs, it’s obviously going up.
You’re obviously making money.
Don’t fight it... Hopefully you’ll agree with me after today’s DailyWealth.
Let me share the facts with you…
In a massive undertaking just a couple of years ago, James O’Shaughnessy studied all U.S. stocks in history going back to 1926, to find out what works in investing. And he wrote the book on it – called What Works on Wall Street.
One of his simple conclusions was that “winners continue to win.”
O’Shaughnessy didn’t have preset notions when he started his research. He just tested everything.
The results were sometimes shocking – the truth turned out to be so much different from what people believe. One of the most shocking conclusions to me was what happens when you buy losers…
People love to buy what’s down – what’s cheap. But O’Shaughnessy discovered that’s a terrible idea…
If you found a list of the worst-performing stocks over the last 12 months, and bought them all expecting a rebound, I hate to break it to you, but history says that rebound typically doesn’t come.
According to O’Shaughnessy’s work, buying last year’s worst performers almost never works…
O’Shaughnessy found that the worst-performing 10% of stocks over the previous 12 months perform absolutely terribly going forward…
Astoundingly, even five years later, you’re STILL worse off buying last year’s bad performers – just about always.
(Specifically, O’Shaughnessy shows that buying the trailing-12-month losers in any month and holding for five years hasn’t beaten buy-and-hold for five years at any time in the last sixty years, with the exception of a brief time in about 2008. Now that is astounding! The chart of that is on page 429 of his book.)
So you don’t want to buy stocks that have been hitting 12-month lows. What about stocks hitting new highs? Yes, you want to own those…
In short, O’Shaughnessy found that buying the best-performing 10% of stocks of the last 12 months dramatically outperforms buy-and-hold going forward.
As I write, the stock market is sitting at all-time highs. Hopefully you’re sitting on some stocks yourself that are at 12-month highs.
Should you sell? Should you worry? Based on O’Shaughnessy’s work, you shouldn’t.
Most people think that when they see new highs, they need to sell. And most people want to buy what’s “on sale” at new lows.
History tells us that you need to do the opposite.
“Winners continue to win,” O’Shaughnessy says. And though he didn’t say it, the opposite is true as well… Losers continue to lose.
So yes, stocks are at new highs. But no – today’s new highs are not a reason to sell…
Don’t forget it…