Last Year's Dogs: Don't Buy Yet

[The Machine]

 

 

Investment lore says last year's big losers make big winners now. Wrong...

 

SO YOU want to buy "what's on sale", right? asks Steve Sjuggerud in his Daily Wealth.

 

We all do...

 

Most investors think that buying what's "on sale" from last year is the right thing to do.

 

The problem is, most investors are wrong...

 

The historical evidence is clear and brutal: You will underperform the market if you buy last year's big losers.

 

I know you might not want to believe me... I know you think you want to buy stuff when it's on sale... But stock market history says that you don't want to do that...

 

History has two very specific conclusions about this topic...

• You do NOT want to buy what has underperformed over the last 12 months (or less). History shows that you do much better over the next year by buying what has OUTPERFORMED over the previous 12 months (or less).
• You DO want to buy what has underperformed over the previous three to five years, and then hold for the NEXT three to five years.

These two conclusions might seem like opposite conclusions at first. But they're not.

 

In short, you want to buy what has done well recently (over the last 12 months or less). This is because short-term trends that are in place tend to stay in place.

 

Also, you want to buy what has underperformed over the long run... These stocks often outperform in the next three to five years, because of "reversion to the mean."

 

So...what do you buy now?

 

Has anything out there had a bad three to five years... but a good last 12 months? Actually yes, a few markets qualify...

 

Japan is the top dog in this category. Japan has underperformed not just for five years...but since 1990. However, in 2013, Japan's market soared...

 

I called Japan my No. 1 investment idea of 2013. I recommended shares of WisdomTree Japan Hedged Equity fund (DXJ) – a Japan exchange-traded fund (ETF) – to my subscribers. DXJ was up 41.5% in 2013.

 

Could Japan soar more from here? I think so, absolutely.

 

Europe in general qualifies as well. The benchmark Europe stock market index – the Euro STOXX index – was up just 4.5% annualized over the last five years. That's pretty poor performance, considering the start date was January 2009 – near the beginning of the Bernanke Asset Bubble. But in 2013, Europe was up 23% in US Dollar terms.

 

Could Europe soar more from here? Again, I believe so. Europe is CHEAP. I explained the basic story here.

 

To conclude, if you're looking for value, you DON'T want to look at what did poorly last year. Based on history, you want to buy what performed poorly over the last five years but had a good year last year.

 

Japan and Europe both qualify.