Pattern Analysis: Using Triangles to Spot Trends in Low-Priced Stocks
In my last column [May 1996] I discussed the potentials that arise from opportunities in investing in past “losers,” primarily low-priced and depressed stocks. I outlined the theories as to why low-priced and depressed stocks could turn into winners, reviewed the studies that support the theory, and commented on some sources for finding these stocks.
However, there is obviously a high risk premium in these stocks, as they are all low-priced and depressed for a purpose. Common sense tells us that if these stocks do indeed provide the better returns, it is reflected in the returns that flow to higher risk takers.
In addition, simply being on a list of low-priced stocks is no guarantee of success. For the unwary, buying into low-priced and depressed stocks is like trying to catch a falling knife.
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