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LOW PRICE

Whenever possible, we prefer to use some nuances in mathematics to ¡°tilt¡± probabilities in our investing favor. One such nuance is a low price.

After reviewing the historical data for tens of thousands of stocks over many decades, one glaring conclusion is this:

It is statistically more likely for a stock to appreciate in price from $2 to $4 than it is for another stock to go from $20 to $40 or from $200 to $400.

In any of these instances, the appreciation is 100% but the likelihoods are markedly different.

The converse is also true, that is, it is statistically more likely for a stock to depreciate in price from $4 to $2 than it is for another stock to go from $40 to $20 or from $400 to $200.

However, the ¡°tilt¡± lies in the fact that a stock can only fall as far as $0 whereas there is no upside limit to the appreciation potential. Stated differently, there is a ceiling to the amount of depreciation in a stock¡¯s value and that ceiling is 100% depreciation.

However, there is no appreciation ceiling. Therefore, a stock has the potential to appreciate 100%, 200%, 500% or even 1000%. This has huge impact in an equally weighted portfolio of stocks.

Clearly, one stock appreciating 100% offsets the loss experienced by another stock losing 100%. But one stock appreciating 100% offsets the losses experienced by FIVE stocks losing 20%

The 2001-05 compound annual rate of growth for our stocks simulation is 42.2% whereas the S&P 500 had negative growth for the period. Through Sep 2006, performance was a gain of 13.3%. Learn more here.

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