Most newcomers to the stock market look for the simple strategies to make ‘quick and easy money', and among the famous ones is the 52-week low strategy.
The logic seems simple, right? Once the stock falls to the lowest it has been in a year, it is bound to rise, and is also easier to buy at a cheaper cost. The alternative would be to buy the stock at its 52-week high and make money as and when it crosses the peak.
While this strategy follows the concept of support and resistance, blindly following this without any other research done is a shot in the dark at best and extremely catastrophic at worst.
What I mean by this is that putting your money in a random stock at a 52-week low or high cannot guarantee any returns, let alone a successful percentage. This is not to say that the 52 week low strategy does not work. It’s very popular for a reason that it does work fairly often.
The merit of the 52 week low
(For simplification purposes, short selling cases are ignored)
As Warren Buffett once said, “Great opportunities come when wonderful businesses are covered with unfavorable events.” Even some of the biggest institutional investors wait for undervalued stocks to touch the 52-week low to buy some shares.
In fact, according to a study, called "Volume and Price Patterns Around a Stock's 52-Week Highs and Lows: Theory and Evidence", stocks bouncing off their 52 week low are expected to provide on an average 0.6275% excess returns in the following week.
Buying Reliance Industries at its 52 week low, with the news and positive investor sentiment, would’ve returned a 130%+ move on your investment!
The price is king and the trend is the kingmaker
Ultimately, a stock at a 52 week high/low is only an event or an indicator. The possibility of your investment making money depends on many factors, most of which can be summed up as the ‘trend’. The ‘trend’ can be determined by quarterly results, general market sentiment, news regarding corporate governance or lawsuits, etc.
And it is this trend that determines whether an investment at a 52 week high/low will be profitable or not.
An investment in Wonderla holidays in November 2019 at its then 52-week low would’ve resulted in immeasurable losses for any investor.
Considering just the Nifty itself, if you bought it at the 52-week low, you would have been sitting on a massive loss of 20% of your portfolio before the index bounced back. However, an entry at the bottom would’ve provided a return of over 100% inside a year.
This article is more of a cautionary message to do your due diligence before investing in a stock at a 52 week low just because it is at a 52 week low. The 52 week low is only a good indication for a potential entry that need not work all the time, especially if the entry is time poorly.