Buying 52-Week Lows: Don't

Editor's note: The utility of buying stocks at 52-week lows has captured the attention of RealMoney contributors and readers. Click here for the prior discussion on this topic.

I was quite surprised by James Altucher's study showing how successful buying stocks making 52-week lows could be. It was totally contradictory to all of my trading experience, as well as a variety of studies I've read.

So I reviewed his analysis further. My conclusion: James created a very interesting stock screener -- one that apparently outperforms the broader markets -- but he failed to address the key issue. That was (and remains) that overall, buying stocks making 52-week lows is a bad strategy.

Further, upon closer review, I discovered his approach has lots of analytical issues and statistical errors. Problems include data mining, back fitting, survivorship bias and several other concerns.

Don't let the math intimidate you. The process of analyzing a statistical argument is a thing you as an investor should learn how to do.

Here are the details:

By James' definition, he is making but one 52-week-low buy per quarter -- his model buys at the first 52-week low, and then sells three months later. All of the subsequent 52-week lows between the buy and the sell over the next 90 days don't get bought in his study. In other words, he tested making one 52-week-low buy every 65 trading days or four buys out of 260 trading days. In theory, it avoids buying as many as 98.4% of these lows.

This is at best only remotely related to what I was discussing. I advised individuals not to buy stocks as they make fresh 52-week lows -- and not to keep buying them as they headed lower.

What James tested was something different. He essentially created an interesting and outperforming stock screen. Indeed, his methodology by design ignores most of the 52- week lows of a falling stock -- as well as my main point.

---

Barry Ritholtz is the chief market strategist for Ritholtz Research, an independent institutional research firm, specializing in the analysis of macroeconomic trends and the capital markets. The firm's variant perspectives are applied to the fixed income, equity and commodity markets, both domestically and internationally. Other areas of research coverage also include consumer, real estate, geopolitics, technology and digital media. Ritholtz is also president of Ritholtz Capital Partners (RCP), a New York based hedge fund. RCP is driven by the analysis performed by Ritholtz Research. Ritholtz appreciates your feedback; click here to send him an email.