𝗜𝗻𝘃𝗲𝘀𝘁𝗶𝗻𝗴 𝘀𝘁𝗿𝗮𝘁𝗲𝗴𝗶𝗲𝘀 𝗳𝗼𝗿 𝗯𝗲𝗴𝗶𝗻𝗻𝗲𝗿𝘀
The 52-Week Low Formula: A Contrarian Strategy that Lowers Risk, Beats the Market, and Overcomes Human Emotion
Today we will be discussing a strategy called "The 52-Week Low Formula" this strategy is described in book called "The 52-Week Low Formula: A Contrarian Strategy that Lowers Risk, Beats the Market, and Overcomes Human Emotion" by Luke L. Wiley
I like this strategy very much because it leaves a lot of room for personalization but at the same time provides a strong framework that is proven efficient.
Few takeaways from the book:
- If you have a problem to solve, consider all the solutions that won’t work and, in so doing, the correct answer reveals itself.
- It is about buying the “right business” at its 52-Week Low versus buying “any business” at its 52-Week Low
- If you want to achieve above average outcomes you must be willing to take an unconventional approach. If your approach is conventional and commonly used then you guarantee average results.
The 52-Week Low Formula - uses five filters, four quality filters and one price filter.
1. 𝘿𝙤 𝙩𝙝𝙚𝙮 𝙝𝙖𝙫𝙚 𝙖 𝙙𝙪𝙧𝙖𝙗𝙡𝙚 𝙘𝙤𝙢𝙥𝙚𝙩𝙞𝙩𝙞𝙫𝙚 𝙖𝙙𝙫𝙖𝙣𝙩𝙖𝙜𝙚? Are they the kind of company that is hard to compete with, either because they have cornered a difficult market or because competing with them would require an unreasonably high investment by others?
2. 𝙒𝙝𝙖𝙩 𝙞𝙨 𝙩𝙝𝙚 𝙥𝙪𝙧𝙘𝙝𝙖𝙨𝙚 𝙫𝙖𝙡𝙪𝙚 𝙤𝙛 𝙩𝙝𝙚 𝙘𝙤𝙢𝙥𝙖𝙣𝙮 𝙧𝙚𝙡𝙖𝙩𝙞𝙫𝙚 𝙩𝙤 𝙞𝙩𝙨 𝙛𝙧𝙚𝙚 𝙘𝙖𝙨𝙝 𝙛𝙡𝙤𝙬? If someone were to come in and buy the entire company, would the free cash flow being generated be well in excess of simply investing in a 10-year Treasury bond? After all, the cash flow on a 10-year Treasury bond is said to be “risk-free” while the free cash flow from a company is not without risk.
3. 𝙒𝙝𝙖𝙩’𝙨 𝙩𝙝𝙚 𝙧𝙚𝙩𝙪𝙧𝙣 𝙤𝙣 𝙞𝙣𝙫𝙚𝙨𝙩𝙚𝙙 𝙘𝙖𝙥𝙞𝙩𝙖𝙡 𝙤𝙛 𝙩𝙝𝙚 𝙘𝙤𝙢𝙥𝙖𝙣𝙮? Is the company using its money wisely to create returns greater than its cost of capital, or is it destroying shareholder value due to generating returns below its cost of capital? Is it using its money well to create returns, or is it taking on bad investments that don’t pay off?
4. 𝘾𝙖𝙣 𝙞𝙩 𝙥𝙖𝙮 𝙤𝙛𝙛 𝙞𝙩𝙨 𝙡𝙤𝙣𝙜-𝙩𝙚𝙧𝙢 𝙙𝙚𝙗𝙩 𝙦𝙪𝙞𝙘𝙠𝙡𝙮 𝙬𝙞𝙩𝙝 𝙛𝙧𝙚𝙚 𝙘𝙖𝙨𝙝 𝙛𝙡𝙤𝙬? There are a lot of companies out there that are making a lot of money, but should revenues stall or decelerate, could their long-term debt be paid off within a short period with free cash flow?
5. 𝙄𝙨 𝙞𝙩 𝙩𝙧𝙖𝙙𝙞𝙣𝙜 𝙘𝙡𝙤𝙨𝙚 𝙩𝙤 𝙞𝙩𝙨 𝟱𝟮-𝙒𝙚𝙚𝙠 𝙇𝙤𝙬?
𝗦𝘁𝗼𝗰𝗸 𝗽𝗶𝗰𝗸𝗶𝗻𝗴 𝗽𝗿𝗼𝗰𝗲𝗱𝘂𝗿𝗲:
1. 𝘋𝘶𝘳𝘢𝘣𝘭𝘦 𝘤𝘰𝘮𝘱𝘦𝘵𝘪𝘵𝘪𝘷𝘦 𝘢𝘥𝘷𝘢𝘯𝘵𝘢𝘨𝘦 (𝘮𝘰𝘢𝘵) - yes/no ?
2. 𝘍𝘊𝘍 𝘠𝘪𝘦𝘭𝘥 > 10-𝘺𝘦𝘢𝘳 𝘛𝘳𝘦𝘢𝘴𝘶𝘳𝘺 𝘣𝘰𝘯𝘥 𝘺𝘪𝘦𝘭𝘥
a. FCF Yield = Free Cash Flow/Enterprise Value
i. FCF - www.investopedia.com/terms/f/freecashflow.asp
ii. EV - www.investopedia.com/terms/e/enterprisevalue.asp
3. 𝘙𝘖𝘐𝘊 > 𝘊𝘖𝘊 (𝘤𝘰𝘴𝘵 𝘰𝘧 𝘤𝘢𝘱𝘪𝘵𝘢𝘭)
4. 𝘓𝘰𝘯𝘨-𝘛𝘦𝘳𝘮 𝘋𝘦𝘣𝘵 𝘵𝘰 𝘍𝘳𝘦𝘦 𝘊𝘢𝘴𝘩 𝘍𝘭𝘰𝘸 < 3
5. 10% 𝘧𝘳𝘰𝘮 52-𝘞𝘦𝘦𝘬 𝘓𝘰𝘸 ?
The risk is managed by picking quality businesses at low price, this usually happens because of negative sentiment and not underlying fundamentals.
It's advised to pick around 25 stocks.
Profits can be taken when a particular stock is not passing some filters, if there are more than 25 stocks passed all the filters, one filter can be turned to a ranking criteria and to pick first 25 stocks and sell if one stock has dropped in the ranking.
This is the step where an investor is customizing the strategy to his own needs.
𝑁𝑜𝑡𝑒: 𝐼𝑛 𝑡ℎ𝑒 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑒𝑥𝑜𝑟𝑏𝑖𝑡𝑎𝑛𝑡 𝑚𝑎𝑟𝑘𝑒𝑡 𝑖𝑡'𝑠 𝑝𝑜𝑠𝑠𝑖𝑏𝑙𝑒 𝑡ℎ𝑎𝑡 𝑛𝑜 𝑐𝑜𝑚𝑝𝑎𝑛𝑖𝑒𝑠 𝑤𝑖𝑙𝑙 𝑝𝑎𝑠𝑠 𝑡ℎ𝑒 𝑓𝑖𝑙𝑡𝑒𝑟𝑠, 𝑏𝑢𝑡 𝑖𝑡'𝑠 𝑖𝑛𝑣𝑒𝑠𝑡𝑜𝑟 𝑗𝑜𝑏 𝑡𝑜 𝑎𝑑𝑗𝑢𝑠𝑡 𝑡ℎ𝑒 𝑓𝑖𝑙𝑡𝑒𝑟𝑠 𝑡𝑜 𝑡ℎ𝑒 𝑐𝑢𝑟𝑟𝑒𝑛𝑡 𝑒𝑛𝑣𝑖𝑟𝑜𝑛𝑚𝑒𝑛𝑡.
Example : $STNE (StoneCo Ltd A), $BABA (Alibaba), $ABEV (Ambev ADR), $DISCA, $ZNGA (Zynga), $ITRI (Itron Inc), $SWBI (Smith & Wesson Brands Inc)
𝑇ℎ𝑖𝑠 𝑖𝑠 𝑜𝑛𝑙𝑦 𝑓𝑜𝑟 𝑙𝑒𝑎𝑟𝑛𝑖𝑛𝑔 𝑝𝑢𝑟𝑝𝑜𝑠𝑒𝑠 𝑖𝑡'𝑠 𝑛𝑜𝑡 𝑎𝑛 𝑖𝑛𝑣𝑒𝑠𝑡𝑖𝑛𝑔 𝑎𝑑𝑣𝑖𝑐𝑒, 𝑒𝑎𝑐ℎ 𝑖𝑛𝑣𝑒𝑠𝑡𝑜𝑟 𝑚𝑢𝑠𝑡 𝑐𝑟𝑒𝑎𝑡𝑒 𝑖𝑡'𝑠 𝑜𝑤𝑛 𝑠𝑡𝑟𝑎𝑡𝑒𝑔𝑦.... Show More