Free Lunch

Investors tend to get rid of their losing stocks near year-end for tax purposes, and this often has the effect of driving the price down to new 52-week lows.

Every year, we hand-select baskets of stocks by eliminating any preferred stocks, closed-end funds, splits, new issues, and any stock that is not a class A share or regularly traded. When there are a huge number of new lows, stocks down the most are selected, even though there are usually good reasons why some stocks have been battered.

This strategy is designed to get in and out as soon as there is a significant gain. These stocks all behave differently, and there is no standard trading rule that applies to these trades. In general, it is best to close out of all these stocks between the middle of January and the middle of February.

This "Free Lunch" strategy is only an extremely short-term strategy reserved for the nimblest of traders. It has performed better after market corrections and when there are more New Lows at year-end. The object is to buy bargain stocks near their 52-week lows and sell any quick, generous gains, as these issues can often be real dogs.

In 2000, we altered our Free Lunch strategy and incorporated AMEX, NASDAQ, and OTCBB stocks with great results.

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BARGAIN STOCKS VS. THE MARKET*
Short Span * New Lows % Change % Change Bargain Stocks
Late Dec - Jan/Feb Late Dec Jan/Feb NYSE Composite Advantage
1974-75 112 48.9% 22.1% 26.8%
1975-76 21 34.9% 14.9% 20.0%
1976-77 2 1.3% -3.3% 4.6%
1977-78 15 2.8% -4.5% 7.3%
1978-79 43 11.8% 3.9% 7.9%
1979-80 5 9.3% 6.1% 3.2%
1980-81 14 7.1% -2.0% 9.1%
1981-82 21 -2.6% -7.4% 4.8%
1982-83 4 33.0% 9.7% 23.3%
1983-84 13 -3.2% -3.8% 0.6%
1984-85 32 19.0% 12.1% 6.9%
1985-86 4 -22.5% 3.9% -26.4%
1986-87 22 9.3% 12.5% -3.2%
1987-88 23 13.2% 6.8% 6.4%
1988-89 14 30.0% 6.4% 23.6%
1989-90 25 -3.1% -4.8% 1.7%
1990-91 18 18.8% 12.6% 6.2%
1991-92 23 51.1% 7.7% 43.4%
1992-93 9 8.7% 0.6% 8.1%
1993-94 10 -1.4% 2.0% -3.4%
1994-95 25 14.6% 5.7% 8.9%
1995-96 5 -11.3% 4.5% -15.8%
1996-97 16 13.9% 11.2% 2.7%
1997-98 29 9.9% 5.7% 4.2%
1998-99 40 -2.8% 4.3% -7.1%
1999-00 26 8.9% -5.4% 14.3%
2000-01 51 44.4% 0.1% 44.3%
2001-02 12 31.4% -2.3% 33.7%
2002-03 33 28.7% 3.9% 24.8%
2003-04 15 16.7% 2.3% 14.4%
2004-05 36 6.8% -2.8% 9.6%
2005-06 71 12.0% 2.6% 9.4%
2005-06 52 11.2% 3.3% 7.9%
2006-07 43 5.1% -0.5% 5.6%
2007-08 71 -3.2% -9.4% 6.2%
2008-09 88 11.4% -2.4% 13.8%
2009-10 25 1.8% -3.0% 4.8%
2010-11 20 8.3% 3.4% 4.9%
2011-12 65 18.1% 6.1% 12.0%
2012-13 17 20.9% 3.4% 17.5%
2013-14 18 25.7% 1.7% 24.0%
  39-Year Totals* 527.7% 124.6% 403.1%
  Average* 13.2% 3.1% 10.1%
* Dec 15 - Feb 15 (1974-1999), Dec 1999-2014 based on actual newsletter advice