Buying stocks priced at all time high?

all time high
asked:


I’m reading Livermore and O’neil and the like who tout buying stocks at an all time high.

O’neil says, “if new high prices make the crowd timid about buying it, then that is likely the precise time to be buying the stock.”

Livermore is quoted saying, “Never sell a stock, because it seems high priced.. Conversely, never buy a stock, because it has a big decline from its previous high. The likelihood is that the decline is based on a very good reason.”

These two don’t make sense to me. Stock are priced based off of the crowd and what the crowd thinks the stock is worth. So.. if the crowd is weary at an all time high (and they sell their shares, which brings down the price of a stock), what makes the stock price go up.. is it future earnings that brings it back up?

More importantly (to me), if the crowd’s fear drops the price of a stock, why would it be a bad thing to buy a stock that has made a decline from its previous high like Livermore warned (since the decline is based off the crowd – which we think is irrational anyway). Why does Livermore say that the decline is most likely based on a very good reason?
Obviously there’s more to selecting a stock than to pick the ones with all time highs and to avoid the ones making a dip.. but these are just one of the pointers history’s “experts” tell us to look for. I’m merely questioning it.



Comments (7)    Posted in Investing    

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7 Responses to 'Buying stocks priced at all time high?'

  1. THE GREAT ONE IS AMONG US - January 24th, 2012 at 5:51 pm

    buy the stocks for kodak lolx

  2. T E - January 27th, 2012 at 8:09 am

    i am not an expert, but here is my two cents.

    the decline is based on a very good reason possibly because of people selling on insider information or because the fundamental of the stock is not there. People buy in thinking that the stock and then get burnt as a result, as the stock keeps going down.

    Yes, there is a herding mentality with respect to stock and the crowd move in one direction, as may be a guru points that direction, until the crowd falls off the cliff…

  3. Caveat Emptor - January 28th, 2012 at 4:33 pm

    “Livermore and O’Neil”? Baloney.

  4. DelK - January 30th, 2012 at 10:53 am

    Short, easy “rules” for buying and selling stocks are easy to pronounce, terribly misleading and short-sighted. It takes volumes to describe stock analysis. On the other hand, if you can make money with one line rules. Hop to it.

  5. pegasusaig - February 1st, 2012 at 7:36 pm

    Something most people don’t understand is that strategies are often linked to individual styles and abilities that can’t readily be copied. There’s a hell of a lot of instinct, a perception developed by experience that enters in to the decision-making picture.

    Along with O’neils statement goes the fact that he doesn’t invest on that alone- it’s a rule he would apply IF he also the stock’s real high was not close yet. He’s a smart guy, but I don’t think he put that part in the book.

    Along with Livermore’s statement is that he is right, most notable declines occur for a reason. Validity of the reason is something else, but there usually is one. However, IF the reason is a mis-perception, then the rule doesn’t apply. Of course Livermore was also familiar with bankruptcy, so he made a few mistakes as well as his successful ventures.

    Regardless of any rules of thumb, a stock that is substantially under-priced or the stock of a company that is about to show some very strong performance that has not been recognized yet is probably a good buy. Stock that is cheap because that’s all the company is worth, or stock that’s high on a bubble of mis-perception is not. There is one rule of thumb that’s highly reliable, but not available often. There are a few people who seem to have the golden touch; any business venture they run does great. Buffet, Steve Wynn, Steve Jobs and so on. If they were to do a start-up, I’d buy without hesitation, betting on the person rather than the details of the business.

    Books are the most common source of general information, but don’t help much in building your instinct. For that, the only tool I know of other than hard experience is a mentor, an experienced and successful investor that you can consult with on specific situations and bounce your ideas around with. That’s not someone you hire or a service you buy, it’s more like someone who believes in you giving you a hand up.

  6. muncie birder - February 4th, 2012 at 5:58 am

    One thing that you did not seem to pick up in your research is the fact that when a stock hits an all time high there is no overhead supply with the stock so there is very little resistance. But every stock will eventually drop from its new high. If you do not believe me, just ask those folks that invested in tech stocks during 2000.

  7. Common Sense - February 7th, 2012 at 8:25 am

    Buy high…. sell higher.

    History is usually a good indicator. Livermore has been the inspiration and the favorite of many successful traders. Getting leads from successful people is always worth taking seriously.


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