The 52-Week Low Formula: A Contrarian Strategy that Lowers Risk, Beats the Market, and Overcomes Human Emotion

198 Pages·2014·2 MB·English

by  Luke L. Wiley

Contents
Introduction
Foreword
Acknowledgments
Chapter 1: The 52-Week Formula
The Birth of The 52-Week Low from a $1,400 Book
Chapter 2: Herding and the Bandwagon Effect
Chapter 3: Filter 1: Competitive Advantage
The Five Competitive Forces
Barriers to Entry
Network Effect
Switching Cost
Powerful Suppliers
Substitute Offerings
What to Look For
Summing It Up
Chapter 4: Five Common Mistakes Investors Make
Mistake 1: Trusting Your Emotions Instead of Engaging the Mind
Mistake 2: Lack of Discipline and What is the Ulysses Contract?
Mistake 3: Apathy the Halo Effect
Mistake 4: Information Overload
Mistake 5: Mistaking Value and the Risk of Familiarity
Chapter 5: Filter 2: Free Cash Flow Yield
Chapter 6: The Power of Fear and Decision Fatigue
Chapter 7: Filter 3: Return on Invested Capital
A Complicated Measurement
Turning Back the Clock
Chapter 8: This Time Is Never Different
Chapter 9: Filter 4: Long-Term Debt to Free Cash Flow Ratio
Calculating Long-Term Debt to Free Cash Flow
A Few Notes about Debt
Long-Term Debt to Free Cash Flow: Head-to-Head
Summing It Up
Chapter 10: The Sunk-Cost Bias and Pride and Regret
Chapter 11: Filter 5: The 52-Week Low Formula and My Journey Trying to
Disprove It
A Matter of Timing
My Journey of Skepticism
Chapter 12: The Importance of Embracing a Trailing 12-Month Return of
−25 Percent
Chapter 13: The Problem with Selective Perception and Confirmation Basis
Chapter 14: Putting It All Together
Reviewing the Filters
Your Part to Play
Afterword
About the Companion Website
About the Author
Index
End User License Agreement
List of Illustrations
Figure 1.1 The 52-Week Low and the Wide World of Possibility
Figure 3.1 A Dollar Invested in the 52-Week Low Formula versus S&P 500
Figure 3.2 The Tech Bubble
Figure 3.3 52-Week Low Performance versus S&P 500 Performance during
Dot-Com Bust
Figure 3.4 Comparing Returns
Figure 3.5 Tracking a Dollar
Figure 4.1 The Emotional Market
Figure 4.2 The Emotional Market, Part II
Figure 5.1 Recovery Following the “Great Recession of 2008”: 52-Week
Low versus S&P 500
Figure 6.1 Average Stock Fund Return versus Average Stock Fund Investor
Return
Figure 9.1 Best Buy
Figure 9.2 Flir Systems
Figure 9.3 Johnson & Johnson
Figure 9.4 Best Buy, Flir Systems, and Johnson & Johnson
Figure 11.1 The Definition of Value
Figure 11.2 52-Week High versus 52-Week Low, Without Filters
Figure 11.3 52-Week High versus 52-Week Low, with Filters
Figure 12.1 Trailing 12 Months
Figure 12.2 Trailing 12 Months versus Following 6 Months in the Strategy
Figure 12.3 Trailing 12 Months as of April 10, 2013
Figure 12.4 Trailing 12 months versus Following 6 months in the Strategy
List of Tables
Table 1.1 Wall Street Firms that Downgraded the Stock After It Had Already
Dropped
Table 1.2 Companies Once “Hated” by Wall Street
Table 3.1 52-Week Low Performance, 1995–2004
Table 5.1 An Example in Calculating Enterprise Value
Table 9.1 Other Examples of Free Cash Flow to Long-Term Debt
Comparisons among Competing Companiesa
Table 11.1 52-Week High versus 52-Week Low, Without Filters
Table 11.2 52-Week High versus 52-Week Low, With Filters
Table 12.1 The Turnaround Results from Figure 12.1
Table 12.2 Trailing 12 Months of Returns from April 2013
Table 12.3 The Turnaround Results from Figure 11.7
The 52-Week Low Formula
A CONTRARIAN STRATEGY THAT LOWERS
RISK, BEATS THE MARKET, AND OVERCOMES
HUMAN EMOTION

Luke L. Wiley, CFP®
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Library of Congress Cataloging-in-Publication Data: Wiley, Luke L., 1975– The 52-week low formula : a
contrarian strategy that lowers risk, beats the market, and overcomes human emotion/Luke L. Wiley.
pages cm
Includes index.
ISBN 978-1-118-85347-4 (cloth); ISBN 978-1-118-85353-5 (ePDF); ISBN 978-1-118-85357-3 (ePub) 1.
Investments. 2. Success in business. 3. Competition. I. Title. II. Title: Fifty-two week low formula.
HG4521.W4764 2014
332.6–dc23
2013051133
To the five most candid and loving board of advisors who help me become the
person they know I am capable of becoming:
my wife, Melissa (Grounded)
daughter, Madyson (Justice)
son, Jake (Humility)
daughter, Leah (Strength)
daughter, Morgan (Joy)
There is one side to the stock market; and it is not the bull side or bear side,
but the right side.
—Reminiscences of a Stock Operator by Edwin LeFevre, 1923
The conventional view serves to protect us from the painful job of thinking.
—John Kenneth Galbraith
There is nothing like losing all you have in the world for teaching you what
not to do. And when you know what not to do in order to lose money, you
begin to learn what to do in order to win. Did you get that? You begin to
learn!
—Reminiscences of a Stock Operator by Edwin LeFevre, 1923
The only function of economic forecasting is to make astrology look
respectable.
—John Kenneth Galbraith
The simpleton believes everything, but the shrewd man measures his steps.
—Proverbs 14:15
The 52-Week Low Five Filter Formula