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Complexity of 52-Week Highs, Commodity Crisis, and more... - Views on News from Equitymaster

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The Equitymaster Research Digest

Complexity of 52-Week Highs, Commodity Crisis, and more...
Dec 22, 2015

  • The stock is too risky. It is currently at 52-week highs!

This was an instant reply from a new team member recently. Rahul Shah had asked him to assess a new stock for Microcap Millionaires.

The company in question, as most microcaps are, is an inconspicuous one. No one on the team had heard of it until Rahul's screen brought it up. There was good reason for us to want more information, so Rahul ran the company through various checks and asked fellow team members to air their views on it.

Our poor new team member's confusion was understandable. He was shocked at the idea of even considering a stock at its 52-week high. This was completely against the principles of value investing, according to him.

It was then our turn to pull him away from what we call 'confirmation bias'. He was making the same mistake most investors make. Whenever they see a stock close to 52-week highs, they conclude the stock is expensive.

This is not to suggest that we are indifferent to the possibility of a sharp correction in a stock at 52-week highs. Rather, instead of rejecting the idea based on data from only the past year, we prefer to take a holistic view.

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