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More to the Story

While loser stocks seem to earn above-average returns if held for long periods, there are clear dangers with this investment strategy. The first is that the proliferation of low-priced stocks in the portfolio results in high transactions costs for investors. The second is that loser stocks may be exposed to more risk, both in terms of price volatility and in terms of high financial leverage—loser stocks tends to have higher debt ratios. The third is that negative returns usually happen for a reason. If that reason, whether it be poor management or a loss of market share, is not fixed, there may be no catalyst for prices to increase in the future.

Transactions Costs

The first and perhaps biggest problem with a strategy of investing in loser stocks is that many of these stocks trade at low prices. The transactions costs associated with buying and selling these stocks is high for at least three reasons:


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