New 52-Week Highs for Our Subscribers

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New highs in some of our stocks … and the psychological dynamic that derails many investors before they see these gains

Friday saw a handful of 52-week highs for three of our analysts.

For Matt McCall, editor of Investment Opportunities, it came from one of his 5G market leaders.

For Neil George, editor of Profitable Investing, it came from a tech dominator.

And for Louis Navellier, editor of Growth Investor, two of them came from two separate powerhouse financial companies.

First, congratulations to each of our editors for these recommendations. Here at InvestorPlace, we’re proud to feature some of the smartest, most successful analysts in the industry. The Friday performance just goes to underscore this reality.

Now, I’m going to reveal each of these stocks in a moment. But there’s an important angle on all these 52-week highs — one we should discuss because it has implications for your own investing and wealth creation.

What’s interesting about these 52-week highs is that Matt, Neil, and Louis all approach the markets with different investment strategies.

Matt is a thematic investor. In other words, he identifies major trends that are re-shaping our world, and by extension, the investment markets. He looks to find the investing implications of these trends and ride them higher for years.

Neil is a master income investor. Whether it be through quality, high-paying dividend stocks, REITs, bonds, or MLPs, Neil excels at finding overlooked investments that deliver healthy income.

Louis is one of the most respected growth investors in the industry. Being a numbers guy, he looks at a company’s income statement, evaluating the strength of their earnings today, as well as expected earnings tomorrow. He uses this to hand-pick a small group of elite stocks that outperform based on superior earnings performance.

Three different analysts, three different styles. But in this Digest, I want to point you toward a similarity … not in their market approaches, but rather, in their winning stocks.

You see, there’s a powerful psychological principle lurking around all these 52-week highs. If you understand it, you can use it to your advantage. On the other hand, when this principle isn’t on your radar, it often leads investors to make market decisions that aren’t in their best interest.

Today, let’s look at this dynamic. Best of all, when you understand it, you can apply it to whichever market approach feels right to you, whether that’s thematic, income, growth, or something else.

Let’s jump in.

***When one of your stocks hits a new high, what emotion do you feel?

I’d guess that your initial reaction is pride. You feel good about picking a winner. Being realistic, your greed probably kicks in a bit. You check to see how much money you’ve made on the investment.

But I’d guess that before long, a different emotion may creep in — uncertainty. You may begin hearing that voice that starts doubting and asking questions …

It’s great that this stock is hitting new highs, but does that mean I should sell now? Maybe sell at least some to lock in these gains? If we’re at a new 52-week high, doesn’t a pullback from this level seem probable? I don’t want to watch my gains disappear.

If you’ve ever felt this way, you’re not alone.

As a group, humans don’t make very good investors. We’re simply not wired for it. Because of our aversion to losses, we tend to sell our winners too early in order to lock in gains before we lose them.

On the flip side, we often hold on to losers for way too long, hoping to avoid the inevitable sale that would lock in those losses.


***Some years ago, the American Psychological Association studied this dynamic

The findings didn’t bode well for us. From that study:

Investors across personality types and demographics have a tendency to sell gaining stocks too early and hold on to losing stocks too long, according to research presented at APA’s 2005 Annual Convention by Bernardo J. Carducci, PhD, a psychology professor at Indiana University Southeast. Moreover, the effect is most pronounced in more educated people.

Investors’ emotions are behind their decision-making, Carducci explained.

“People want a sense of pride, so they sell a winning stock because it makes them feel good,” he said. “And they avoid [selling] a losing stock because of feelings of regret — they feel bad about their decisions. So they hold onto that loss a little bit longer.”

The article goes on to describe the experiment conducted, which involved stock market gains and losses and their effects on investors.

The researchers found that investors held on to a losing asset significantly longer than a gaining asset, and when gainers were sold, they were generally sold on price upticks.


***With this in mind, let’s now look at the 1-year charts of the five stocks which set 52-week highs this past Friday

From Matt, here’s Ericsson, his 5G market leader …

 

From Neil, here’s Microsoft, his tech dominator …

 

And from Louis, here are MasterCard and PayPal, his powerhouse financial companies …

 

 

I want you to look at how many different times each of these stocks pushed to a new high on their respective charts.

It’s a little hard as we can’t see the individual days, but when you do a blunt look at “new peaks,” I’m roughly counting between 9 – 11 for these five stocks.

I don’t know about you, but I’d find it hard to hold through all of this. I’d have wanted to lock in some gains at one of these peak-moments. But given that each of these stocks hit a 52-week high this past Friday, had I sold, I’d have missed the biggest gains.

***What we’re describing is what’s known as “momentum investing”

In simple terms, let’s borrow from 9th grade physics to explain this phenomenon. Paraphrasing Newton …

An object in motion stays in motion in the same direction unless acted upon by an unbalanced force.

An article from Financial Times describes it this way:

(Momentum investing) refers to the propensity for relative winning stocks to keep winning, and losing stocks to keep losing … … when investors set up mechanistic momentum strategies, which hold the winners over a recent period (usually the last six months or the last year) and sell short the losers, and keep rebalancing, they reliably make money.

Academics have documented a momentum effect across the world, and in time periods going back two centuries …

Further, momentum has been consistent. Using the database of historic U.S. stock returns compiled by Dartmouth University’s Kenneth French, Mr Asness and his colleagues show that a “winners minus losers” strategy gained 8.3 per cent per year from 1927 to 2013, compared with the 7.9 per cent by which stocks as a whole outperformed cash, and the 4.7 per cent by which cheap stocks beat expensive ones. This advantage persists even when these returns are adjusted for risk.


***The great thing about using momentum is that it doesn’t have to conflict with your core market approach

Momentum isn’t beholden to any single market strategy. It’s more of what we call an “overlay” because it can be applied to many different styles. This makes sense given that Matt, Neil, and Louis all have different market approaches.

As an analogy, let’s say we have three car-racing fans. The first guy swears his Ferrari is the best. The second prefers his Porsche. The third, her Lamborghini.

Momentum investing would be a bit like offering each of these owners a superior, high-octane engine that would make their respective cars faster. The underlying car is the same — it’s just been tweaked a bit for higher performance.

Coming full circle, another congratulations to our analysts. But it’s important to recognize that these winning stocks have come from different market approaches. What connects them is momentum — a series of new peaks that continued to come over the last 52 weeks.

Related to this, how do you respond when one of your stocks begins making new highs? Are you tempted to lock in gains, or do you allow momentum to continue pushing higher?

If your tendency is to sell, perhaps it’s time to rethink that.

Have a good evening,

Jeff Remsburg


Article printed from InvestorPlace Media, https://investorplace.com/2019/03/new-52-week-highs-for-our-subscribers/.

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