I’m guilty of randomly opening to pages of Security Analysis by Ben Graham and reading a few of them before bed every night.
This night, something was different. Chapter 41:
A study done by the Business school at the University of Chicago came upon 2 conclusions:
1. Low-price stocks tend to fluctuate relatively more than high-price stocks.
2. In a “bull” market the low-price stocks tend to go up relatively more than high-price stocks, and they do not lose these superior gains in the recessions which follow. In other words, the downward movement of low-price stocks is less than proportional to their upward movement, when compared with the upward and downward movement of high-price stocks.
Do note that this study was 1926-1935, so the data is limited. I say, so what? I think it’s more accurate than one would think. Graham takes it to the next level! This is very important.
Some Reasons Why Most Buyers of Low-Priced Issues Lose Money. The pronounced liking of the public for “cheap stocks” would therefore seem to have a sound basis in logic. Yet it is undoubtedly true that most people who buy low-priced stocks lose money on their purchases. Why is this so? The underlying reason is that the public buys issues that are sold to it, and the sales effort is put forward to benefit the seller and not the buyer. In consequence the bulk of the low-priced purchases made by the public are of the wrong kind; i.e., they do not provide the real advantages of this security type.
This is why Tim Sykes does a good job of making a great deal of money by shorting penny stocks that people recommend to him… and it’s why I go out and find my stocks by sorting through thousands as opposed to getting tips at the watering hole, from the hairdresser, from the taxi driver, or from spam emails claiming the best stock ever.