“What seems too high in price and risky to the majority usually goes higher, and what seems low and cheap usually goes lower.” – William J. O’Neil
The ‘N’ in the CANSLIM strategy stands for either a ‘New Product,’ ‘New Management,’ ‘New High,’ or any other new factor, which could positively change the operating environment for the stock and ultimately drives its price into newer realms.
Contrary to conventional wisdom, buying low and selling high is not an easy way to make money in the stock market. In fact, it can be quite risky because in many cases, you’re buying damaged goods.
We would like to specially draw your attention to buying into new highs. Buying a stock when it is scaling new highs might seem strange and scary to many investors. About 98% of individual investors would never buy a stock that makes new highs. Buying a quality stock at a new high is buying into the emerging strength with a belief that it could prove to be the beginning of the next big move.
But, don’t buy every stock that makes a new high, make sure that the stock breaks out of a sound base pattern before it sails above the pivot, on a higher than the average volume. In addition, investing when the stock price is way too extended, say 5–7% or higher from its pivot is not ideal.
Traditionally, investors often believe that they are value investing, when they prefer to shop stocks near their 52-week lows. The idea of buying from a discount sale in a supermarket rarely applies while buying stocks. Stocks on the new-high list tend to go higher in price, while those on the new-low list tend to go lower. Good quality products are always expensive, so are the good quality stocks.
Don’t be afraid to buy a stock when it is showing supreme relative strength and sitting near highs. There is no shortage of precedents that show big market winners staging multiple breakouts during multiyear runs. Don’t be quick to say it is too late, especially if a compelling growth story is still intact.
For example, look at the chart of Central Depository Services (India). It advanced 70% in the last three months. Its ideal breakout and buy point was at an all-time high in February, and after breakout, it progressed higher making higher highs. By avoiding growth stock at all-time high with a proper base pattern and strong fundamental and technical profile, you are avoiding a multibagger stock.