These Stocks May Be The Weak Link In Your Portfolio

I talked yesterday about one of the biggest mistakes most investors make.

That is, thinking that a stock’s recent “price discount” must certainly make it a “better value.” (A.k.a., a “buy” at a “good price.”)

But the sad truth is, buying recently “discounted” stocks is usually a losing strategy. That’s because weak stocks usually get weaker, not stronger.

And I have some eye-popping numbers to back up that claim.

Imagine for a minute that you’re limited to buying S&P 500 stocks. And that you can choose one of the following two investment strategies.

After sorting all 500 stocks in the S&P 500 index, based on their performance over the last quarter or so… you can either:

Buy the 50 Best Performing stocks… and hold them for a quarter or so.

Buy the 50 Worst Performing stocks… and hold them for a quarter or so.

We’ll call Option A, “buying the winners,” and Option B, “buying the losers.”

Although most investors don’t think they’re buying “losers,” they mistakenly think they’re buying “a nicely discounted stock.” That’s what Bill, our fictitious investor from yesterday’s story, thought when he decided to buy three stocks in late 2007, at “discounts” of 13%… 17%… and 40%.

Sure enough, the three stocks that Bill bought at a “discount” – Bed Bath & Beyond, American Airlines and E-Trade – were trading at even deeper discounts a few months later, as the stocks dropped a further 17%… 54%… and 65%, respectively, by March of 2008.

Simply put: “cheap” got cheaper (and Bill lost his shirt).

And this concept isn’t limited to a few cherry-picked examples. Take a look at three of the research studies I ran, all of which show the same trend: weak stocks get weaker.

Buying the losers (Bottom 50 S&P stocks) in late 2007 would have handed you an average loss of xx% by March 2008. Meanwhile, Top 50 stocks held up much better. Take a look:

The same thing happened a few months later.

Buying the losers (Bottom 50 S&P stocks) in early 2008 (while thinking, “the worst must be over”) would have handed you an average loss of xx% by August 2008. Meanwhile, Top 50 stocks held their ground.