For investors building a portfolio of individual stocks, the fundamental goal is to find great companies whose stock price has the potential to rise dramatically. But most investors avoid buying stocks off the one list where those types of companies are guaranteed to show up -– the 52-week high list.
The desire to buy things for as cheap a price as we can is natural. It’s a concept we start learning practically as soon we begin to reason –- always look for a deal. So it doesn’t matter if we’re contemplating the purchase of a flat-screen TV, a new car or a house, or a stock, we want to get the best bargain possible — and at the very least, avoid “overpaying.”
But this mindset turns out to be at odds with the dynamics of the stock market — and often causes investors to avoid buying the best companies.
Stocks Aren’t Wasting Assets
When you go into a store to buy a product, in almost all cases it is a “wasting asset.” Over time, wear and tear — as well as the introduction of newer models — conspire to make the product less and less valuable, and thus less desirable. That’s why Craigslist and garage sales exist – to get rid of items that once were more valuable then they currently are.
But in the stock market the goal is to buy an asset -– in the form of a share of stock –- that will hopefully be in more demand in the future and garner us a high price than we paid for it. And the 52-week high list is the perfect place to look for those type of stocks.
“It doesn’t matter how smart you are; how ingenious you investing idea is,” says Ivaylo Ivanhoff, chief strategist for Social Leverage 50, which selects and ranks stocks in the early stages of their price growth cycle. “Until the market agrees with you, you won’t make a cent. And the market agrees with you when you see your stocks on the 52-week high list.”
Those sentiments seem to be backed up not only by math, but by common sense as well.
Apple for $4
For example, at the end of 2004, Apple (AAPL) was trading around $4 a share on a split-adjusted basis — which was not only a 52-week high, but an all-time high –- and had gone up 300 percent in the previous year alone. To many, this was a sign the stock was too expensive.
But before a stock can go up 5,000 percent — like Apple did between 2004 and 2014 — it first has to go up 50 percent. And then 100 percent. And then 200 percent. And so on. And each time it does, chances are it is hitting 52-week highs.
“The 52-week high list is basically a short-cut into the minds of people, who can create and sustain trends,” says Ivanhoff, referring to the large institutions who can move markets and individual stocks with their investments.
History shows that once a major move begins, it can continue for a long time. Look at the charts of widely held blue chip stocks like Microsoft (MSFT), McDonald’s (MCD), Walmart (WMT) and Home Depot (HD), or even lesser-known names like Taser (TASR), Monster Beverage (MNST), Baidu (BIDU) and Pharmacyclics (PCYC). During their most explosive price appreciation periods, they were consistently showing up on the 52-week high list, sometimes for years on end.
The Strong Get Stronger
In the stock market the general rule -– no matter how counter-intuitive it seems to investors -– is “the strong get stronger,” and those stocks that will continue to get stronger cannot do so without showing up on the 52-week high list.
Because of this phenomenon, investors would be wise to forget about finding under-performing “bargain” stocks that might someday be winners and instead concentrate on stocks that are already winners and will continue to be.
As Ivanhoff is fond of saying when it comes to stock picking, “Stop trying to find the next Starbucks (SBUX). Starbucks might be the next Starbucks.”
Brian Lund has developed a list of “20 Books Every Investor Should Know About.”
This is the granddaddy of them all. Start to type “emergency” into Google (GOOG), and the first suggestion is “emergency fund.” The rule is to make sure you have six month’s of living expenses tucked away in cash in case you losefyour job or suffer a financial setback. Of course it’s important to have a financial safety net, but when you earn virtually nothing on your cash, this rule can cost you. For example, if six months of living expenses for you is $25,000, you’d be sacrificing close to $1,000 of income a year by keeping this money in a checking or money market account.
For years, I’ve broken the mold on this financial rule by telling clients they shouldn’t have their emergency fund in cash. Instead, choose a short-term bond fund that pays 3 percent or higher for your safety net. If you need the money quickly, you can easily sell the fund and get access to the cash. If you don’t need the cash –- and these emergency fund accounts are rarely used –- you can still make money on the assets.
Not so fast. There are many good reasons to contribute to a 401(k), such as tax savings, tax-deferred growth and a possible employer match, but there are also good reasons not to contribute as well. Don’t blindly dump money into your 401(k) if you don’t have an emergency reserve of some sort and there is a chance you will be laid off. It is taking longer for most to find a job, so if you think you may be out of work, make sure you have the resources to pay rent and buy food until you land a new job.
Also, if your employer doesn’t provide a match and you are in a low-income tax bracket, it may make more sense to pay the tax now (since you are in a low tax bracket) and invest in a Roth individual retirement account instead. Use this 401(k) vs. Roth IRA calculator to crunch the numbers.
You cannot cut your way to wealth. Too many people and financial advisers focus on trimming expenses when they should be focused on the other half of the equation — income. I’m a proponent for living within one’s means, but too often that creates an artificial barrier or ceiling. “This is what I make, so I have to cut back to save more,” is often the thought process. Rather than living within your mean, work on increasing your means.
There are many ways you can make more money, including asking for a raise, boosting your skills –- your human capital –- and getting a promotion, starting a side project in the after-hours or going back to school and starting a new career. What you make today is not necessarily what you can make tomorrow. Cut unnecessary expenses and then use your energy to increase your income.
You should only save for your children’s education if you can afford it. That means when you’re on track to having enough assets for your retirement. Assuming you have the retirement assets and now want to save for college, most advisers will recommend a 529 college savings account.
Not so fast. These 529 accounts have some real advantages, such as tax-free growth of contributions if they are used for approved higher education expenses. This tax-free growth is a big benefit. However, if you withdraw money from this account and do not use it for approved higher education expenses, the gains will be subject to ordinary income tax and a 10 percent penalty.
The big risk is if you fully fund your child’s college education but he or she decides to not go to college, drops out, finishes early or goes to a less expensive school. You have the ability change the beneficiary to another qualifying family member without penalty, but if you have just one child, there may not be anyone you can transfer the funds to. You would then have to liquidate the account and pay the tax and penalty. If you are undeterred and still want to pay for your child’s college education, start with a small contribution into the 529 and fund up to a maximum of 60 percent of the cost in case one of the above scenarios occur.
The certified financial planner designation is the gold standard when it comes to financial planning. I wouldn’t think of hiring a financial planner if they weren’t a CFP practitioner. However, just because you are working with a CFP doesn’t mean you shouldn’t research your adviser, his or her areas of expertise and how he or she charges. The CFP tells you he or she has advanced training in areas related to tax, investing and retirement planning; has passed a comprehensive and difficult exam; and has agreed to adhere to a high code of ethics.
The onus is on you to know what you need and to make sure your CFP financial planner can deliver. Don’t get lulled into thinking that just because he or she have three letters after his or her name that he or she has been screened. Ask tough questions before you trust your money to anyone -– even a CFP.
Most financial pundits will advise taxpayers to have just enough taken out of their paycheck so when April 15 comes around, they will neither owe money nor receive a refund. The rationale is if you get a refund from the Internal Revenue Service, it means you paid too much in over the year — and the government has had use of your money without paying you any interest. Keep the money and invest it yourself is the theory.
‘Again, that’s the theory, but reality is much different. It all comes down to psychology. I look at paying a bit more to the IRS as a forced and automatic savings account. Sure you won’t earn interest, but human nature tells us you probably won’t save the money anyway. There is a greater chance you will squander $100 a paycheck then if you receive a $2,400 check from the IRS. One approach takes a plan and discipline each month to save and invest while the other doesn’t. A check from the IRS isn’t an interest-free loan; it is an automatic savings plan.
Nobody wants to endure an IRS audit, but too often I see honest and ethical taxpayers avoid claiming certain deductions or taking certain positions that are completely legitimate because they fear it will increase their chances of an audit. First, your chances of being audited are small –- about 1 in 104 chance. If your return doesn’t include income from a business, rental real estate or farm, or employee business expense deductions, your chances are even smaller -– 1 in 250. Second, if you and your tax preparer are not crossing the line, you have little to worry about. In fact, thousands of taxpayers get a check from the IRS at the end of the audit. Don’t let a small chance of an audit keep you from taking advantage of every tax strategy for which you qualify.
Do what you love, and you’ll never have to work a day in your life, or so the saying goes. It sounds good and feels good, but it’s not necessarily true. Sometimes –- often, actually –- doing what you love can be a great hobby but not a good career. There are a lot of things I enjoy that I’ll never make a dime doing. A better approach is to find something you enjoy, are good at and that you can get paid to That is the financial trinity you should aspire to find because it ties your interests with your skills with the marketplace
Follow this rule, and I’ll send you straight to detention. We know college costs are soaring, and we don’t want to bury our kids in college debt, so most parents prioritize college saving over retirement saving. Big mistake. If worse comes to worst, Junior can get a loan, work while in school or go to a less expensive school. Basically, Junior has decent options, and you have tough choices.
If you haven’t saved enough for retirement, you are stuck. There’s very little you can do other than slash your expenses, work longer or both. Save for your own retirement first. That’s the financial rule you should follow. If you have amassed so much wealth when your children head off to college that you can afford to help them, go for it. If you haven’t, you’d be doing your kids a disservice by jeopardizing your own retirement by paying for their tuition.