Dont Catch a Falling Knife
One of the most common mistakes made by inexperienced investors is trying to "catch a falling knife". This is the phrase used to describe the habit of buying stocks that are in "freefall", and is a poor strategy, albeit common among new investors. Sadly, it is a common practice even among old and experienced investors. I've even fallen prey to it myself. Remember, there are two primary approaches to investing: fundamental analysis and technical analysis. We generally fall into the fundamental camp, since we evaluate stocks based upon their valuations, rather than looking primarily at their short-term price movements. We take this direction because we believe this provides the greatest potential for long-term success. A single-minded view of only the fundamentals of an investment, however, can limit an investor's profits and lead to some unpleasant positions. This is because there are real limitations to buying a stock as it falls. One may purchase a stock that appears to be a great value at $10, only to see it fall to $5. Surely, if the stock rises again to $20, you may have been "right" to buy at $10, but one might argue that you weren't "right enough". Buying at 5 would have yielded a 300% return, while you settled for only 100%. Furthermore, if you were convinced that $10 is a reasonable price, you might have saved time by buying it on the way back up instead of on the way down. It is quite simple ? buying a stock that is in mid-fall is not a pleasant experience, and it isn't difficult to come up with a variety of other strategies that would bring happier outcomes. Still, we mustn't avoid all stocks which have dropped. In fact, studies have shown that investors who buy stocks which have fallen hard tend to outperform the market on a regular basis. In fact, such a bottom-fishing strategy can provide one of the best performance levels of all strategy sets. Missing out on these opportunities can be costly. The decision then is not whether to buy "fallen angels", but WHEN. This is where a tad of technical analysis skill comes in handy. While technical tools can't really tell you which stocks to buy (unless you're willing to buy any piece of junk that happens to have good price momentum), it can lead us to a better understanding of timing. Once we have selected a good investment based on fundamentals, it is time to decide when to put the money down. A good first step is to watch for a positive movement on good volume before committing. As long as the stock is dropping, there is a good chance you may get it at a better price. Better to wait a few days (or weeks) to assure your purchase is timed appropriately. There's no advantage to buying before the time is right, even if the choice of stock is ideal. It is here that patience is a virtue. Don't try to catch falling knives, but be sure to pick them up after they hit the floor. By: Scott Pearson For more information, quesitons or comments please visit our website at www.valueview.net. You can also email us at article@valueview.net or Scott directly at scott@valueview.net President Scott Pearson is the Chief Investment Advisor for Value View Financial as well as a writer, editor, instructor, and business leader. As editor and publisher of Investor's Value View, a nationally distributed investment newsletter, he provides general money tips and investment advice to readers, and demonstrates a special knack for locating and providing analysis for undervalued stocks.
To reach Scott for questions or comments please send an email to scott@valueview.net. You can also visit his website at http://www.valueview.net
Related News
|
 |
|
|
RELATED ARTICLES
Secret Stock Options Trading Strategies the Experts Don`t Want You to Know
To understand stock options, we need to look at Webster’s Dictionary’s definition of the word strategy.
Boost Your Income With Financial Spread Betting
About 6 years ago I started to notice that certain friends of
mine had quit their jobs but continued to live very luxurious
lifestyles - seemingly without doing very much. I thought
they must just be using up their savings until I discovered
they were all making a fantastic living by spending just a
few hours a week doing something I had never heard of before
- "financial spread betting".
Buy: Hold: Sell: Jump
I'm sitting here at my computer desk with a cup of coffee at my
elbow. The coffee rest in a mug, the mug garnished with the words
Buy, Hold, Sell, Jump, vertically along its sides. Emblazoned
across the top of the cup are the words, Wall Street, which
encircles the upper portions of the mug. The handle of the mug is
quite ornate, rounded at the bottom, with a cradle in the
handle's top. In the cradle is a die, with a small metal pin
through the die, which enables my thumb too spin the die. Instead
of numbers, as in a pair of dice, the die's choices are Yes, No,
and ? And, lo and behold, an article is born.
Buying Florida Investment Properties and Where Its Hot
Relaxing in Style: Florida Investment Properties
Sell Discipline for Investors: Importance and Execution
Investors usually don't have an aversion to buying an asset. The real gut wrenching decision is when - and if - to sell. What most don't realize (or don't want to realize) is the overwhelming importance of the sell decision. Let's explore the reasons why and the techniques that can calm a seller's nerves.
IF - The Wonders of Investing
If it seems as if all investors are selling, who is buying?
Investing 101: Risk Terminology - BETA
About thirty years ago, statisticians armed with all of their
statistical theories began to confront the financial markets. A
handful of useful tools emerged that the average investor should
be familiar with when they look to purchase stocks.
Trend Following
Trend following also called momentum trading is the simplest and safest method of stock market investing. It puts you in stocks and mutual funds that are going up and gets you out when they start down. Properly done there is no guess work.
Lessons in Transition
Q: What have been the most successful approaches to attracting direct foreign investments: offering prospective investors tax breaks and similar benefits, or improving the overall investment climate of the country?
Rolling your 401k: Contributory IRA vs. Rollover IRA
In an ideal world you would start your working career with a great company in your early 20s, steadily climb the corporate ladder, retire at age 65, and draw a sufficient income from your accumulated 401k account to live happily ever after.
5 Day Trading Tips for Success
1. How to Treat Gap Openings
Annuity Investment - The Whole Truth
Do you ever feel like you haven't been told the whole truth? Kind of like something is missing? Well, you are not alone.
Investing: Do You Want To Make Money, Or Would You Rather Fool Around?
It always amazes me how much stock market investors resemble horse track bettors. Some are very conservative, willing to trade low returns for relative safety. Others bet with both hands, looking for the big score. In this article, I'd like to introduce you to a few characters I've met at racetracks. Then we'll see what they can teach us about investing.
Diversify!
The best way to avoid being hit hard by a stock market crash or another Enron/Worldcom fiasco is to make sure you don't put all your eggs in one basket. Diversification helps ensure steady growth of your net worth as you accumulate more assets.
Powerful Hidden Techniques Mystery Formula - The Covered Call Option Trading Buy-Write Strategy
For better or worse, most option trading investors purchase stocks with the intent of holding their shares for an extended period of time.
Value Investing
By definition, value investing is the process of selecting stocks that trade for less than their intrinsic value. A value investor typically selects stocks with lower than average price-to-book or price-to-earning ratios. Of course, it is not nearly this simple. Value investing is the corner stone of long-term growth. Those who practice it survive the ups and downs of the market and are more likely to emerge wealthy than those who ride the market, in principle, due to the higher quality of the companies falling under the prerequisites of the value investor. Value investing is essentially concerned with getting the most profit at the lowest cost. The basis of value is profit. Value investing is an investment style which favors good stocks at great prices over great stocks at good prices. Value investor extraordinaire Warren Buffett has used this style to become a billionaire.
Financial Planners
"Financial planners are like dentists: they may occasionally inflict pain, but in the end, you will be better off for following their advice!"
Easily Finding A Good Stock
There is a tremendous amount of software,
complicated high priced newsletters, radio and
TV stock pickers and Internet web sites that
will help you find a stock that is going to make
you rich.
Franchise Opportunity Sellers Beware; franchise buyers lie on forms?
It seems completely absurd that franchise buyers lie about their financial position, available cash and abilities in order to buy a franchise. After spending 8 years setting up franchises around the nation and fielding inquiries I am appalled at the lack of integrity of the average business buyer. If you wonder why franchisors make franchise buyers fill out forms and ask lots of questions it is because 75% or more of every franchise inquiry to a franchise company is misrepresentative of their reality. A franchise opportunity seller should beware of franchise buyers lying on forms.
Direcway & Wildblue Set to Square Off this Fall?
There is a cat fight brewing between Direcway LLC, Starband and Wildblue Communications for the large number of people in the U.S. who can't get some type of broadband internet and are willing to pay $50 or more to get better speeds. The combatants are telling investors there are 20-30 million "potential users" out there in rural or underserved America...true, but the historical fact of the matter is that up to now, only 500,000 or so have been willing to pay as much as $50-$100 a month for the "so called" high speed services offered by Direcway, Starband and now Wildblue.
What has changed to stir all the press and advertising hubub by the companies? The claim is that both the Wildblue ka band and new Direcway 7000 offerings will finally give consumers a more DSL/Cable-like internet experience...ie lower latency and higher upload speeds. They expect that tens of millions of rural Americans will flock to their doors to pay over $50 per month to be "connected". To a degree they are right. It has become virtually impossible to funcion as a business without broadband internet and it is more and more difficult as a consumer to do without it. Even retailers (who obviously target consumers) are building sites that are very difficult to navigate unless you have a fast connection to the net. Pictures chew up bandwidth.
|
