Why You Should Buy Stocks With Strong Past Price Appreciation

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The world of stock investing is filled with jargon, complexities, and many, many choices. But at the core, the biggest question comes down to this: "What stocks should I buy?" With so many companies to choose from, Motley Fool co-founder David Gardner uses a number of filters to narrow down his candidates. In particular, for his Rule Breakers portfolio, he has a half-dozen attributes he wants to see, one of which is "strong past price appreciation."

In this mailbag segment from the Rule Breaker Investing podcast, listener Randy Stevenson asks, what exactly does that mean? Gardner is happy to explain, because it comes down to one of his core views as an investor: Winners keep on winning.

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A full transcript follows the video.

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*Stock Advisor returns as of January 31, 2019The author(s) may have a position in any stocks mentioned.

This video was recorded on March 27, 2019.

David Gardner: This is from Randy Stevenson, writing from Venice, Florida. He said, "Hi David. I've been following Motley Fool since the AOL days." I have to add before we go on, hashtag awesome. "I've been a subscriber to Hidden Gems, and currently to Rule Breakers and Stock Advisor. Thank you for enriching my family these decades." That always means a lot. Thank you, Randy! "One of the characteristics of Rule Breakers is strong past price appreciation. Please explain what this is and what metrics or sources of information are used to find these companies. Thank you again, Randy Stevenson."

This is a quick one for me, Randy. Yes, you're right. One of the six attributes that we look for finding Rule Breakers is strong past price appreciation. Back in the day when I was first dreaming up this approach, before we even wrote it in our first book, Rule Breakers, Rule Makers, where I really first talked about Rule Breaker Investing in book form -- back in those days, I was using Investor's Business Daily, the newspaper, which for years has, I think it's still present tense, but I don't really use IBD that much anymore, has printed what's known as a relative strength score, which is a 0 to 100 indexed view of how well that stock has done over the last three months. For example, if it was a 94, that means that stock has done better than 94% of all other stocks on the market. It's like if you're really good in your math SATs, and you were 94th percentile. It's the same thing for judging price movements of stocks. I like to look back around three months and just see how stocks are doing, which stocks are doing well.

More broadly, though, Randy, primarily for this attribute of Rule Breaker Investing, I just look for a stock that is doing well, that's going up. I think the winners keep on winning. I know you know that from me. I don't necessarily use IBD's relative strength ratings anymore, I just look at the stock and I say, "Has that beaten the market over the last three months?" Maybe, in some cases, it's doubled over the last year.

Again, I think the key point here is, a lot of people look at that and say, "Well, I'm not going to buy it now. Look how well it's already done. I missed that double over the last year." We as Rule Breakers generally feel the opposite way. This trait is there to teach you and to train you to think -- in a winning way, I think -- about Rule Breaker Investing, where we look for stocks that are doing really well, because that's the market telling us that this company is onto something good and doing great stuff.

Randy, I hope that's helpful. There's no hardcore metric I use. In fact, when I googled relative strength, which you can do from the comfort of your own home computer or mobile phone, you'll see a lot of sites that have it, define it differently. A lot of them are about charting and technical analysis, which are so-called tools -- I do that a little bit with a smile on my face -- that I never use and actively try to avoid. I don't look at charts. I don't believe that there are patterns that tell us where stocks are about to move. I realize there's a whole industry dedicated to that, but that can bedevil people. So don't necessarily start googling relative strength and using those sites, at least in my experience, to guide you toward good investment decisions, because often, I don't think that they will.

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