Effective Advice For A New Generation of Investors
CATCHING A FALLING KNIFE One of the most common mistakes made by inexperienced investors is trying to "catch a falling knife". This is a habit, common among new investors, of buying stocks that are in "freefall", and it's a bad idea for an investment strategy. Unfortunately, it's common even among old and experienced investors. I have to admit that I've even made that mistake myself. There are two primary approaches to investing: fundamental analysis, and technical analysis. At my firm, 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. Just looking at 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. You may purchase a stock that looks great at $10, only to see it fall to $5. If the stock rises again to $20, you may have been "right" to buy at $10, but maybe you weren't "right enough". Buying at $5 would have yielded a 300% return, while you settled for only 100%. Furthermore, if you thought that $10 was a reasonable price, you might have saved time by buying it on the way back up instead of on the way down. Let's face it: 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 will bring better results. Still, we shouldn't avoid all stocks that have dropped. In fact, studies show that investors who buy stocks that have fallen hard, tend to outperform the market on a regular basis. In fact, this "bottom-fishing" strategy can provide one of the best performance levels of all, but missing out on these opportunities can be costly. The decision then is not whether to buy "fallen angels", but when. This is where a bit of technical analysis skill comes in handy. Unless you're willing to buy any piece of junk that happens to have good price momentum, technical tools can't really tell you which stocks to buy. But they can lead us to a better understanding of timing. Once you select a good investment based on fundamentals, it is time to decide when to put the money down. A good first step: 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 right. There's no advantage to buying before the time is right, even if the choice of stock is ideal. In this case, patience really is a virtue. Remember: don't try to catch a falling knife ? pick it up after it hits the floor! R. Scott Pearson is an investment advisor, writer, editor, instructor, and business leader. As President and Chief Investment Officer of Value View Financial Corp., he offers investment management services to a wide variety of clients. His own newsletter, Investor's Value View, is distributed worldwide and provides general money tips and investment advice to readers both internationally, and in the U.S. Prior to founding Value View, Scott edited the Pearson Investment Letter for eight years, and served as a Registered Investment Advisor for Pearson Capital Management. His newsletter articles and recommendations have been reprinted in other leading investment publications, including Investor's Intelligence, Bull and Bear and the Dick Davis Digest. In addition, he has written columns and articles of general interest for various newspapers, covering a wide range of topics from investments and IRAs to mortgages and credit issues.
Related News
|
 |
|
|
RELATED ARTICLES
Landlording 101, Tricks of The Trade
Looking Inside Your Tenant's Mind
Basic Mind-Reading Report 101 for Landlords
June 2005: Weather Forecasts for Weather Traders
If Johannes Kepler, the renowned 17th century astronomer and discoverer of the planetary laws of motion, could speak from the heavenlies, he might have a few words of wisdom to share with the National Weather Service. Although Kepler's name is not normally associated with meteorology, he was quite the weather forecaster in his day. His first claim to fame, by the way, was not due to his discovery of those planetary laws, but because of his accurate long-range weather forecast of the severe winter that put Styermark, Germany on ice in 1593.
How to Buy to Let
Find out everything you need to know about buy to let. Learn what to buy, where to buy and what not to buy. All this information about buy to let won't cost you a penny.
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.
Find a Methodology and Minimize Investment Madness
There are many reasons to be investing these days, and too much opportunity to not have your money working for you.
Lobster Trapping for Investment Ideas
Recently, my family and I took a trip to Maine to visit relatives. During our stay, we toured the rocky shore lines and took in the beautiful architecture of the old towns.
Effective Advice For A New Generation of Investors
CATCHING A FALLING KNIFE
Can Your Annuity Do This?
Many people buy annuities according to their agent's recommendations. However, many people do not even know what they own. It is a good idea to take inventory of your investments, and particularly your annuity. It is important to understand what your annuity can and cannot do and what features it has. Here are some of the things you definitely must be sure to know about your annuity:
Almost Anyone Can Open A Roth IRA!
The Roth is kind of weird until you get used to it in terms of how much you can put in (contribute) each year depending on how much you earn (compensation). Because of this you really have two limits, one dealing with your compensation and the other dealing with your contribution. Let me explain.
Rules of Simple IRA Your Business Needs to Know
A Savings Incentive Match Plan for Employees plan, better known as a SIMPLE plan, is an IRA-based retirement plan available to employers with fewer than 100 employees.
Before You Start Investing
There maybe several reasons why you to want to invest your money. You may want to retire early, want to build your own business in the future, or to pay for your kid's education. Should everyone start investing outside their retirement accounts right away? The answer to this question is that it depends on your financial situation. First, you must have a basic understanding in financial management. What would happen if you lose your job, accumulate large medical expenses, or losing money on your investments? Do you still have money to pay your bills? Do you have to sell your investments that you have worked so hard for, with a loss? No one knows what the future will bring. Therefore, you must have a safety net to fall back on in an unexpected event. This article contains 5 concepts that you should follow before you start investing outside of your retirement accounts.
Buying a Home - Your BIGGEST Investment
This column has often focused on intangible investments like stocks that a young investor might hold in their portfolio. While these are one of the most important components of an investment plan, it is not the dominant one for most young people. Even for some who are much further down the path of life, stocks and bonds often pale in comparison to the role that a home plays in their investment life.
Trading Is Not Rocket Science!
Despite what some people may lead you to believe; day trading, swing trading and trend trading is not anywhere as difficult as they would like you to think. It really boils down to two key components.
A Safe Port For Mutual Funds But Not You!
Soft dollars, a form of legal kickback, is a sly way you can get ripped off by mutual fund managers. Full service brokers give these kickbacks to non-indexed mutual funds in the form of a "rebate" to purchase research, software, and even computer equipment.
Why the Rich Keep Getting Richer
Rich people: fortunate, lucky, selfish, and arrogant? Or highly educated, caring, brilliant individuals? Becoming rich isn't hard, but it does require a bit of time and knowledge. Having time to get rich, educating oneself, and buying assets are the three key factors in attaining untold wealth.
It Is Never Too Early To Start A Roth IRA!
The Roth is kind of weird until you get used to it in terms of how much you can put in (contribute) each year depending on how much you earn (compensation). Because of this you really have two limits, one dealing with your compensation and the other dealing with your contribution. Let me explain.
Which IRA Is Best For You?
An Ira is one of the greatest ways to save on taxes currently and accumulate money for the future.
Trading For A Living - Part 2
In part 1 of this article I started to look at the financial implications of giving up the day job to instead start trading full time for a living. There are more than just monetary considerations as we will see later, but for now, there are some more costs to ponder.
Larry, Moe and Curley, Investment Brokers
Larry, Moe and Curley were sitting in their
favorite restaurant just off Wall Street having
their usual 3 martini lunch and were discussing
the day's events and their client portfolios.
Brain Snappers and Other Wall Street Nonsense
The last time you spoke with your broker did
he use any of the following words? Diversification,
Price-to-earnings ratios, discretionary trading,
lifting a leg (he's talking to you not your
dog), leverage, divergence, fee-based
compensation, escalator clause, tactical asset
allocation and other mesmerizing words to place
you in stupefying shock.
|
