By Dr. Steve Sjuggerud,
Stocks are knocking on the door of new highs as I write. This scares most folks, as they don’t want to buy anything at record-high prices. Instead, they prefer to buy at new lows. But that doesn’t mean you should follow them. Instead, I strongly urge you to not be like “most folks” in this case. They don’t know their history.
In short, we know from looking at more than 80 years of stock market history that buying at new 12-month lows is one of the worst possible investing strategies, and buying at new 12-month highs is one of the best.
These conclusions might surprise you. They would surprise most folks. But I assure you they are correct. Let me explain.
James O’Shaughnessy literally wrote the book on what works on Wall Street. He titled it: What Works on Wall Street. In the section called “Buying the Worst-Performing Stocks,” he writes, “If you’re looking for a great way to underperform the market, then look no further.”
One particularly bad strategy was buying the worst-performing 10% of stocks over the past 12 months. Buying these stocks and holding them for five years underperformed the “buy and hold” strategy 93% of the time since the 1920s.
In short, don’t buy the worst-performing stocks! But what about when the market is hitting all-time highs, like today?
New highs tend to inspire fear, not confidence. But the normal reaction here is wrong. We studied the data going all the way back to 1927 – as long as the S&P 500 has been around. It turns out that stocks hit new highs around 10% of the time.
New highs aren’t as uncommon as you might expect. And what happens after new highs is also unexpected. In short, new highs lead to new highs, which lead to new highs.
Again, we looked at the numbers back to 1927. If you had simply bought stocks each time they hit a new all-time high, and then held for 12 months, you would have outperformed the typical (“buy and hold”) one-year gain.
The table below shows the returns:
|After new high*
|* Not including dividends.
The outperformance doesn’t look amazing… but you’re in this “trade” 10% of the time, so it’s hard to see dramatic outperformance anyway.
What is interesting is how consistent the gains are – stocks have been higher 70% of the time, a year AFTER hitting a new all-time high. So if you’re scared of new highs, our message is simple: don’t be. History is clear. New all-time highs are a good thing for stock prices, based on history.