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Do stocks always seem to fall after you buy them?

Do you buy cheap stocks only to sit back and see them get much cheaper?

Or, following selling a stock because it is ‘expensive’, will it continue to rise in a seemingly deliberate attempt to spite and humiliate you?

Well, this is the topic of my Facebook chat with Kris Sayce today. Hit the screenshot beneath and have a listen. And remember in order to ‘like’ it:

In today’s Money Morning I’m going to provide you with a solution to these woes. I will explain why so many people seem to make these ‘mistakes’. Don’t worry, I’ve made them too. It’s what led me to this answer.

But first, a quick comment on the latest from China. Just what is happening in the Middle Kingdom? Are the Mandarins starting to lose it?

Yesterday wasn’t a high quality one for the central planners. Credit data for the month associated with July showed that nearly 900 billion yuan in new financial loans went to ‘non-bank financial institutions’. This is cash that effectively went to support the stock market.

The data from Reuters is actually even worse:

‘China has enlisted $800 million worth of public and private money in order to prop up its wobbly stock markets, a Reuters analysis exhibits, but the impact of the unprecedented government-orchestrated rescue has so far already been modest.

‘Public statements, media reports and market data demonstrate that Beijing unleashed 5 billion yuan (515 billion pounds) in funds – equivalent to nearly 10 percent of China’s GDP in 2014 as well as greater than the 4 trillion yuan it committed in response to the global financial trouble – to calm a savage share sell-off.’

Hang on…let’s get this directly. China just blew 10% of its GDP to prop up the stock market!? In the event that true, this is crazy. No surprise money is flying out of the country.

And after that at the same time, China devalued its forex, the yuan, against the US dollar. While the devaluation was ‘only’ 2%, that is large in currency terms and the biggest move in the actual yuan against the greenback since 94′.

I’ve warned about this happening. The US dollar is in a fluff market and it’s dragging the yuan along with it. That makes China’s exports much less competitive and with the economy struggling, it doesn’t need a strong currency.

The market reaction was negative. Aussie stocks started strong yesterday but then turned down because news of the devaluation hit. Asian markets fell as well and the selling continued in Europe and the US immediately. Clearly there is concern about the state of the Chinese economy and an official devaluation hints that China’s frontrunners might be worried too.

But as far as I can tell, this was bound to happen. China’s trying to manage a bust after going through a boom. It doesn’t seem sensible that its currency should rise. Its strength is purely a result of the peg to the dollar. So it makes sense to loosen that peg a little, no?

China said the adjustment was a ‘one-off’. Which means it probably is not. If it is a sign of things to arrive, it could accelerate capital moves from China and lead to a tightening of domestic financial policy. This in turn would sluggish the economy further. That isn’t a good sequence of occasions.

Is this the ‘treadmill to hell’ that Jim Chanos said China was on? Whatever it is, the risks are clearly increasing for The far east. Its managers really need to tweak their economic knobs carefully.

This is all part of the big picture unpredictability unfolding in the world due to a busted upward monetary system. It’s not going to alter folks. In fact, it’s only going to get worse.

Which brings me to the topic: how do you invest sensibly and prudently in such an atmosphere? I used to think that ‘value investing’ was the solution. I studied Warren Buffet as well as learned to focus on things like return on equity and guide values. His valuation strategy is different to what most people believe or understand, but it’s brilliant.

But I’m no Buffett. No one is. There’s no point trying to emulate a genius. You have to find your own way. I also worked out that Buffett’s achievement has much to do with random chance, a fact that he too has acknowledged in the past.

He started investing during America’s gold economic age. An already powerhouse economy gained the ‘exorbitant privilege’ of issuing the world’s reserve forex. This was an effective tax on the rest of the world, a tax capitalised in to US stock values, all of which Buffett owned.

That’s why Buffett is so gushing in his praise for the US economy. There’s none like it in terms of range and diversity. But there is also no other that gets a free kick like the US does.

Buffett’s genius is in having the patience and the stock selecting skills to sit back as well as let the magic of adding to work. Few of us have this type of luxury.

Also, Aussie companies don’t have the same scope for development as US companies. You can’t just sit back and personal an Aussie stock for 10 or 20 years and let the development take care of itself. Our economy is too small, too narrow, as well as too cyclical.

I found myself buying stocks that I thought had been cheap…only to see them drop by another 30% or so. Value investors think this is great, and that you should buy more! However i found that ‘averaging down’ was the fatal flaw in value trading.

I also found the ‘Buffett’ worth approach hit and miss. Some stocks went on to do very well, and some stocks turned out to be duds…their high returns on equity a short term mirage.

There had to be a better way, I thought. A way of continuing to invest properly by ‘buying low’, but also protecting personally against common mistakes.

Then I read Reminiscences of a Stock Operator. Written by Edwin Lefevre, it’s a book about the experiences of Brian Livermore. Livermore was a Wall Street investor in the early 1900s. You think financial markets are volatile now! Back then there were no central banks to appease investors at the first sign of trouble.

Livermore didn’t care about value. He cared about ‘the tape’. If stocks ‘acted well’, he bought them. If they continued to ‘act well’, he bought more. A stock ‘acted well’ if it went up. Simple as that.

What Livermore was really saying was that he invested with the trend. If a stock had been going down, he got out.

After absorbing Livermore’s lessons (and having discussions with our own ‘Quant Trader’ Jason McIntosh), I began to realise further how flawed worth investing is. Buying reduced is fine, but it’s not fine to buy lower, and lower…before you run out of cash or confidence.

A strict adherence to ideals doesn’t take human feeling into account. A stock may look like good value, but if the trend is down and sentiment is actually negative, why stand in the way in which? Why not be patient, wait for the trend to exhaust itself on the downside and buy on the way support?

It sounds so simple which i can’t believe it took me such a long time to work it out.

But I guarantee you, if you go back and check out every stock you misplaced money on, it will be because you bought into a downtrend or you didn’t escape when the trend turned from bullish to bearish.

I know I’m no Buffett. And I’m not a investor in the sense that Livermore was. However by combining the lessons from all of these two disparate approaches, you are able to become a much better investor. Tomorrow, I’ll show you how…

Regards,

Greg

The Earth, as I’m sure you know, has a magnetic area. Now I’m no professional, but if I recall my senior high school geology correctly, this is generated by churning liquid iron close to the solid core of our world. This magnetism results in the Earth having a northern and a south pole.

And that’utes why you can depend on a compass needle to point north. A fact that’s come in quite handy for those moving uncharted territory in the days before the Gps navigation.

But, according to Scientific American, every few hundred thousand years the magnetic rods flip. That means that your compass needle will point south instead of north. And, according to the article, ‘Earth’s permanent magnetic field flip could happen sooner than expected.’

But don’t go throwing out your own trusty compass just yet. Even if the flip does happen sooner than expected, we’re still talking hundreds of years from now.

Why do I bring this particular up? Because a number of the editors have done their own magnetic area flip recently. And this hasn’capital t taken hundreds of years, either.

The magnetic field flip

‘You’re traveling through another dimension, a dimensions not only of sight and sound but also of mind and heart. A journey right into a wondrous land whose boundaries are that of feeling and imagination. Look quickly. That’utes the signpost up ahead — your subsequent stop, The Twilight Zone!’

The Twilight Zone, CBS, 1959

Over the last few weeks here at Port Phillip Publishing’s headquarters, quite a few editors’ investment compass needles have moved highly away from their magnetic northern.

Perhaps the biggest shift came from Kris Sayce. For years he’s been bullish on the stock market, dismissing one false ‘crisis’ after another. And he’s been spot on. But over the last couple weeks Kris has taken a different read on the situation.

He sees a number of negative elements lining up that could well cause a marketplace crash as early as October. He’utes given the full details to customers of Tactical Wealth. Plus a number of inventory recommendations to hedge your portfolio against any major drop in the markets.

In short, it must do with rising interest rates as well as falling company earnings. And when Kris is right, this could well be the combination that drags the markets down by 20% or more.

Of program Kris hasn’t recommended you sell all of your stocks. In fact, over at Microcap Trader, Kris and analyst Shae Smith still uncover tiny Aussie listed companies that should do well regardless of how the wider market moves. Three of their four ASX outlined stocks are currently up. One of them by an eye-popping 196% since they tipped it on 23 June.

Our resident bear

Then there’s our resident bear, Vern Gowdie, the editor of Gowdie Loved ones Wealth.

You’re probably familiar with Vern. He’s a former financial planner who got out of the industry within 2006, after he cautioned his clients about the difficulty facing the markets. He was about two years early on that warning. But his clients — at least those who took their advice and moved their own wealth into cash — overlooked on the GFC market panic and the resulting 50% plunge in the ASX.

Since the launch of Gowdie Family Wealth two years ago, Vern has advised his customers to stay out of the inventory and bond markets, and out of commodities. He views the markets as extremely overvalued, supported by unsustainable levels of private and public debt, not to mention government intervention.

Vern’s long advocated a 100% cash placement, advising patience. After the market crashes, losing 50% or more in value, there will be plenty of discount hunting to be done.

That crash has yet to occur. So you can imagine my surprise when I read Vern’s August issue and discovered he has just made his first stock recommendation in nine years! (Cue the music from Twilight Zone.)

Now to be clear, Vern has not gone bullish. Far from it. But he does see some potential short term gains in one particular area. Here’s what he told his subscribers last week:

‘My criteria with regard to investing, are simple — low risk/high come back.

‘This is another way of saying buy reduced and sell high.

‘These opportunities do not come together everyday. You have to wait and wait some more for the buying opportunity. And then you have to wait around and wait some more for that market to eventually move the cost.

‘For more than a year and a half right now, I haven’t made any sort of investment recommendations to you — aside from my personal advice on how to get the best as well as safest returns on your cash — because the market prospects have all already been high risk/low reward.

‘But that has recently changed.

‘Although the truly low risk/high incentive prospects have yet to materialise, there is 1 beaten down commodity that represents the first opportunity to move part of our holdings out of cash, at least for a while.’

Vern’s also currently operating around the clock on a brand new project. I only just had my own close look at this last week. I can’t share any of the details along with you yet, but I can tell you that from what I’ve seen, this could be the most important investment advisory around australia.

We’ll fill you in on all the details towards the end of this month. Stay tuned.

Regards,

Bernd Struben,
Managing Editor, Money Morning

Yesterday I explained why I thought a person shouldn’t get too bearish on this market. Overnight, US stocks soared for the first time in a week on the back of Warren Buffett’s huge purchase of aerospace manufacturer Precision Castparts.

Even commodities lifted themselves up off the floor. Gold traded nearly as high as US$1,110 and finally appears like putting in a weak bounce following the big sell-off of recent weeks.

After a great rally yesterday, the Foreign market looks set for an additional strong session today.

Does this imply I’m right? Is the modification over? Kris Sayce and I ponder this particular very question in the second hit of our Facebook mini video clip series. Simply click on the screen shot below (and remember to ‘like’ it!).

Of course, I’ve got no clue what’s going to happen tomorrow or the next day. But that’s not necessarily a bad thing. In fact, knowing that you don’t know is a major advantage. It’s when you think you know how things will play out that you get into trouble.

That’s the reason why I’ve developed a new kind of analysis that fuses each fundamental and technical abilities. I’ve been testing and using it since November last year and so far, the results are extremely impressive.

You’ll hear more about how it works later this week. I’ve just finished putting a report together on it and plan to send it to you on the weekend, so watch out.

The big idea though is to not be too wedded to any 1 view. While it’s important to have a view, being too rigid can cause losses or missed opportunities. I wrote about this to my subscribers lately. It a really important subject to tackle if you want to develop being an investor so I’ll recreate some of it here…

‘Being a slave to your prejudices or even biases is the greatest mistake you can make as an investor. I’ll tell you a story in a moment that confirms this and recounts my biggest investing mistake.

‘Yet the finance industry and also the financial media make little attempt to genuinely educate investors towards falling into this snare. Rather, they take advantage of your feelings!

‘Perhaps that’s because investors enter the trap with such ease time and time again. And they put their poor decision making down to just about everything however their own failures.

‘But let me tell you: you don’t lose money in the marketplaces because you’re unlucky. And you don’t lose money because somebody did or said so-and-so. You shed because you’re trapped in a story of your own making. This trap is built out of inherent prejudices and ethical judgments about the way issues ‘should be’.

‘This is not meant to be the sermon. I’m saying this simply because I’m guilty of the same mistakes. Guilty of thinking the world is a mess, and that the problems that led to the 2008 crisis only have grown worse in the years since. Guilty of thinking that due to this, an even bigger stock market fall lies ahead.

‘More than that though, I’m guilty of thinking the future will, or should, play out according in order to my view of the world. What hubris to think I can tell the future!

‘We’re told good investors have highly held views — that they have confidence and make bold calls. And that is true. But good investors also know that they don’t understand. And they are ready to change their views if things don’t pan out the way they expected.

‘They are not locked into a narrative. Nor do they put their money where their morals are.’

Of program it’s not easy to put your biases aside and invest truly objectively. But it IS possible…and it’s easier compared to you think.

Last year, after considering long and hard on this, I developed a system of analysis that fuses two traditionally separate investing methodologies to test my opinion against the market’s view. Yesterday, I said I’d show you how you can use this particular ‘fusion method’ to buy and sell person stocks.

Let me show you how it works. An example is in the energy sector. Essentially, many large Aussie power stocks look vulnerable. That’utes because they’ve spent billions investing in massive liquefied natural gas (LNG) projects over the past few years. More to the point, they invested in the expectation of higher oil prices.

Now, just as individuals projects kick off, the price for LNG (that is linked to oil prices) is really low that the returns on the capital invested will be very reduced indeed. More than likely, the results will be below the cost of funds. Such an outcome doesn’t bode nicely for share price performance.

But because these are such large and longevity projects, companies will continue in order to produce despite lower prices. It’s not as if they can just sit down and wait for prices to recover.

So the basic story is negative. But do the charts back this view up? Indeed they do. Let’s have a look at one of the more susceptible Aussie energy stocks, Santos [ASX:STO].

It has a sizable exposure to new LNG production. This should lead to a big jump in earnings. But it’s unlikely to occur. The market is telling you to be very cautious. Have a look at the graph below:

The first warning sign that something was wrong with STO occurred on October 2014. I mentioned ‘shifting averages’ yesterday. They remove the noise that comes from daily price unpredictability. They are a good indicator from the underlying trend. As you can easily see in the chart, the moving averages crossed over in October last year, signifying the stock price was in the downtrend. This was a signal to escape.

Then the stock collapsed in The fall of and December before the bottom pickers came in.

But here’s the problem. The buyers were swimming from the tide. They were fighting the trend, that is always a low probability outcome. Despite a series of bounces in the share price because December 2014, the trend continued to suggest down.

And just recently, the inventory made a new low. This confirms STO’s downward trend. Trying to pick the bottom is a harmful game. I know, because I’ng played it before. Sometimes you win, sometimes you lose.

In this situation, the ‘fusion method’ of analysis tells you to stay away from the sector. Poor fundamentals combined with an adverse technical outlook is a red-colored flag.

And it’s not just Santos. Woodside [ASX:WPL], Oil Search [ASX:OSH] and Origin Energy [ASX:ORG] are all in downtrends. WPL and OSH are close to producing new lows while ORG recently broke down to new lows.

The message here is that this is not a stock specific issue. The whole LNG sector is under pressure. Avoid these types of stocks for now. They may be great buys now, but you’lso are taking a big punt. Wait for the pattern to turn first.

I’ll explain the best way to spot a change in trend in a few days. For tomorrow though, I wish to focus on something I discovered very recently — the fatal drawback in value investing.

Regards,
Greg

When an investment fund describes by itself as ethical, I’m always curious. Who decides what is ethical and what’s not really? And why are some teams of ethics perceived to be superior to others?

Those questions came to mind when I read how?superannuation fund Australian Ethical has concluded that agriculture is not sustainable. Therefore, it will not be investing in any food production companies. A couple of other funds have made similar noises.

The choice has been widely criticised in the media as unrealistic and ridiculous, given food production is fundamental to our lives. It is ridiculous, but my interest is in the company’s claim that it is acting ethically. What are the values behind claiming? Are they values that the everyone else should accept?

You get a sense of Australian Ethical’s values from the fund’s website. It says it does not invest in things like tobacco, uranium or fossil fuel mining, exploitation of people or old growth forest logging, as well as says it will not invest in organisations that pollute land, air or water, or destroy or waste non-recurring resources.

Organisations that ‘extract, create, produce, manufacture, or even market materials, products, goods or services which have a harmful effect on humans, non-human animals or the environment‘ will also be out.

It supports the development of sustainable land use and food production, the preservation associated with endangered eco-systems, and the dignity as well as wellbeing of non-human animals. It also aspires to build a ‘new low-carbon economic climate, fund medical breakthroughs, technology breakthroughs, efficient transport and more.‘

And it seeks to use its influence to improve ‘ethical behaviour’. In other words, such as missionaries promoting religion, it is so persuaded of the merits of its integrity it feels entitled to distribute them.

One may question why anyone would oppose zero emission nuclear energy, poverty-relieving coal-fired electrical power and renewable forestry. However, I don’t think I’ve ever met anyone who purposefully advocates activities that are harmful to the environment or animals. Definitely all the farmers I know are ardent environmentalists, and caring properly for livestock is simply good business.

What it comes down to is that the fund has a particular concept of durability, perhaps the most over-used and misused word in the English vocabulary. Everybody uses it, but there is no agreement as to what it means.

A manager might suggest that maintaining the current business course isn’t sustainable; a lawyer might dispute a particular case is not environmentally friendly; an athlete might declare a certain training program to be unsustainable; and increasingly, the impact of an exercise on the environment might be described as unsustainable. The only thing you can be sure associated with is that being ‘unsustainable’ is not great.

It has long been green dogma that modern agriculture is not sustainable. Conditions such as monoculture, factory farming as well as industrial agriculture are used in a derogatory sense to reinforce that view.

Plenty of people, either in a nature of compromise or because they do not know any better, go along with the suggestion that agriculture should be ‘more sustainable’, the assumption being that it isn’t now.

My preferred definition of the word originates from former Norwegian Prime Minister Gro Harlem Brundtland, who said, ‘Sustainable development is development that fits the needs of the present without compromising the ability of future generations to meet their own needs‘.

Based on that definition, modern farming is not only sustainable, but more sustainable than it has ever been.

Here in Australia we’re often informed that anything done by people to change the environment is proof in itself of unsustainability. The key presumption behind the term ‘wilderness’ is the absence of human impact, or at least of white Europeans.

That thinking is less common outside the country. A farm owner in Eire once told me of proof of human settlement in the area returning 5000 years. He also said that his farm, which has been in the family for generations, could run 20 cattle in the 20’s, 50 in the 1950s, One hundred at the turn of the hundred years and was now up to 120. He expects it to be running 150 within a decade.

It is obvious his farm has not only been capable of providing for its previous and present owners, but will continue to do so for future generations (in this case the actual farmer’s children) as well. In other words, it’s long been sustainable and is environmentally friendly now.

What’s more, it’s the utilization of modern technology — so despised through green dogmatists — that makes this feasible. Vaccines (increasingly the product associated with genetic engineering) and chemicals help keep cattle healthy. Meadow management using hybrid seed products and chemical fertiliser indicates there is enough food on their behalf. High tech nutritional supplements ensure they receive a balanced diet. Advanced synthetic breeding technology means cows produce a calf each year which the calves grow quicker or produce more milk than ever before, and that there are more heifer than bull calves on dairy farms.

If agriculture is to feed the world, it needs more durability like this. It will be modern technology, not really a return to the last century or beyond, that ensures the soil and water are preserved. Genetically modified crops and pasture plants, for example, are not only seen fundamental to raising the nutritional value of pasture, but combating desertification and drought.

What’s needed is recognition that human impact on the environment is not only unavoidable but mostly highly good. Moreover, the concept of virgin backwoods untouched by humans should be exposed for the lie that it’s.

Australia’s ‘old growth’ temperate forests are all regrowth following repeated burning through Aborigines over thousands of years. The bison-grazed plains of North America were reprocessed by Native Americans long before Men and women showed up. Many of the mist-shrouded treeless grasslands of the exotic Andes are the result of burning as well as grazing after locals cut down the natural forests centuries ago.

It is a simple fact that nature is resilient and adaptable. In a thousand years the farms of today will be producing far more meals and fibre they do now. That makes them sustainable, and provides the lie to the ethics of Australian Ethical.

There is completely nothing ethical about leftover rooted in the past, using outdated technology to produce food that lots of people cannot afford to buy. Indeed, by my ethical standards, Australian Ethical is unethical in its refusal to invest in modern agriculture and contribute to the supply of high quality, nutritious, affordable meals produced more sustainably than ever before.

Which raises an interesting question: in the event that everyone decided investing in farming was unethical, we would quickly find ourselves in an ethical problem. Given an inevitable shortage of food, which fund manager don’t let kill and eat first?

Regards,

David Leyonhjelm,

Contributor, Money Morning

Editor’s Note: David Leyonhjelm is a normal Money Morning contributor. He has worked in agribusiness for 30 years and is the NSW federal senator — and somewhat of a controversial figure. Donald represents the Liberal Democratic Celebration in the Senate. The LDP is a libertarian party which advocates individual freedom and choice, and limited government.

From the Port Phillip Publishing Library

Special Statement: Nitro Stocks Completely unknown to most Aussie investors, there is a special kind of ASX investment that can generate more money in a week than most people earn in a year! They’re called ‘Nitro stocks’ and they can cram 20 or 30 years of market earnings into just a few months. Mike Volkering says, ‘It’s like taking a slow-moving bluechip and pumping it full of anabolic steroids!‘ Sam’s spotted three stocks on the verge of hitting their ‘Nitro-phase’. And if you want in, you’d better hurry!

Everyone loves a bargain. It’s a excellent feeling to lock in a big discount.

We naturally link affordable prices with opportunity. That’s how we’re wired. And in many situations this works.

The Punching Day sales are a classic. Long lines snake about street corners. The prospect of obtaining a deal is irresistible. Individuals want to buy as soon as the price falls.

But should we approach stocks the same way?

Possibly the most famous stock market maxim is actually ‘buy low, sell high‘. The saying is all about as old as the marketplace itself.

This is largely a statement from the obvious. That’s how you earn profits — buying low and promoting higher. There’s nothing profound in that.

But here’s the catch. How do you determine buying low?

The mistake in buying low

You see, many people believe buying low means purchasing when prices are falling. This strategy typically works well for consumer goods. But how does it fare in the stock market?

Well I’ve done some back-testing to discover. I’ll tell you about this in a moment. But first I want to recap last week’s report.

You’ll remember the discussion involved buying strong stocks. This was in response to a member’s concern that Quant Trader signals some stocks from record highs. His thinking was that buying after a big move is extremely risky.

As you realize, I ran a back-test to obtain some data on this. The test had two new rules for buy signals:

1. A stock must be at a three 12 months high (or greater)
2. It should be at least 300% above its 3 year low

Here’s the chart you saw last week.

It turns out this was a successful strategy. You could do instead well just buying shares at three year levels.

This isn’t any great surprise. Buying stocks at multi-year highs is trading with the trend. And the odds favour a pattern will keep going.

Last week, We said I’d show you some examples. Let’s do that now.

Stocks that double, and keep going…

These three stocks are from the back-test which produced the above graph. This is why it’s a mistake to avoid stocks simply because they are strong.

The first stock is Aurora Oil & Gas [ASX:AUT]. It ceased trading last year following a takeover.

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The system’s buy sign was at $0.95 on 9 August 2010. The shares were 850% off their 2009 low. AUT had also just hit an eight year higher.

Just think for a moment. Would you think about buying?

Let’s see what happens next.

Strength led to more strength. The system captured a 169% gain next 12 months.

The next example is a financial services company — Credit Corp [ASX:CCP].

Here’s the actual chart.

CCP was at an all-time higher when this buy signal had been identified in late 2004. The actual shares were also 720% above their 2000 low.

Buying at this stage runs counter to the better judgment of many. But the data suggests this shouldn’t be the situation.

Let’s check out what happened.

This stock had a lot further to go. The positioning made a hypothetical 245% in less than three years.

Last but not least is Greencross Veterinarians [ASX:GXL].

This is the chart.

The buy sign was at $2.43 in August 2012. The shares were just hitting an all-time higher. This was also 305% above the stock’s reduced two years earlier.

The result tells a familiar story. Here’s the ultimate chart in the series.

This trade ran for just under 2 yrs. The end result was a 220% gain. Pretty good for buying at a record higher.

There is no doubt about it — buying into strength can lead to big gains. You’re more likely to dual your money when trading with the trend. The path of least resistance is up.

It’s important to note that this won’t always happen. There’ll be other times when the stock becomes lower the next day. That’s why there exists a stop loss. It limits the risk.

Okay, so this brings us to my opening question.

Should all of us buy stocks that are slipping in value?

I found a fascinating article while researching for this update. It was published by a popular local investment advisory last November. The crux of the story was that stocks buying and selling near a one year reduced are potential bargains.

Yes, they may be. The wreckage of the past can lead to excellent opportunities. But I would want to see signs of an upward trend before buying. That’s the Quant Trader way.

The writer didn’t seem too fussed by this fine detail. He identified three slipping stars as potential buys: Crown Resorts [ASX:CWN], Woolworths [ASX:WOW], and The Reject Shop [ASX:TRS].

Guess what. All three are lower today — despite the All Ordinaries buying and selling higher.

Buying at a one year reduced seems more of a snare than a bargain. But this is simply a small sample. We’re going to need a bigger test.

So let’s reverse the strategy you saw earlier. This time I’m going to set the actual algorithms to only buy stocks at a three year reduced (or lower).

Here’s what happens.

This shows the hypothetical profit from the process. The date range is One January 2000 to 24 April 2015. It assumes placing $1,000 on every purchase signal.

The outcome is clear. This tactic is a total failure…it’s got nothing to show after Fifteen years.

Buying as prices tumble below three year lows is no bargain. Back-testing indicates it’s much better to jump on board an established trend.

As they say, the trend is your friend!

Until next week,

Jason McIntosh,

Editor, Quant Trader

Editor’s note: It’s now eight months since Quant Trader began giving live signals. And I can say this — the strategy of buying into strength is working BIG time. There are now 12 trades displaying a profit of more than 70%. The largest gain is 164%. Find out how YOU can industry this way here.