If you wouldn’t buy more of a company that falls in price you probably shouldn’t have bought it in the first place. This also means that if a company you own and believe in falls in price this isn’t the time to panic but at time to gobble up more shares at a discount. This is because price action is temporary and has little to do with the actual fundamentals of the company. Most short terms moves in the market are as a result of the emotions of day traders and current events.
When you invest in the long term you aren’t concerned with the day to day news that impacts the market short term. If you have been watching the market for any amount of time you have seen that short term news (Brexit, 911, Fiscal Cliff, etc) impact the market price out of fear and uncertainty but at the end of the day, business must go on. Stock prices ALWAYS go back to normal. That return to normalcy, for the people who were wise enough and psychologically strong enough to buy when everyone else says sell, is what makes you rich.
Warren Buffet always says that it is better buy a good company at a fair price than a fair company at a good price. This is significant because so many times people ask whether they should buy a company after the stock takes a hit on news or if they should wait for a bottom. This is also significant because too many people look at stocks that are priced low (like penny stocks) and avoid stocks like Google and Amazon that are high priced and avoid them. In stocks, like anything else in life, you get what you pay for and a high priced stock is usually a high value stock.
In regard to timing your buy on a dip, I would argue that if it is a good company and it is down 20% off news that is 20% profit that is sitting there for the taking. On the other hand, if it is a poor company down 20% it might still not be worth the investment. It all boils down to the fundamentals and the outlook. If you wait to time the bottom you could miss a buying opportunity if it runs up unexpectedly. If you hop in “too early” you might lose another 5% if it doesn’t hit the bottom but you still have a net gain when it does run up. That’s just the cost of doing business.
Asymmetrical Risk Reward
You have to look at what is called asymmetrical risk reward. This theory essentially measures the worst case scenario downside risk as opposed to the upside. This analysis is what I used to bet on SNAP. Essentially you need to look at a trade based on risk reward. If you could lose your shirt and there is limited upside maybe because the company is trading at its 52 week high then maybe you should avoid it. That could be a 5 to 1 risk reward where you lose five with the hope of only gaining one. If the stock is trading around its 52 week low or significantly off its high or if it is trailing its 20 day moving average then that is a strong case that it is a value play. This is similar to SNAP where you can lose 5 but gain 10. The odds are in our favor.
Naysayers don’t get rich
The importance of this post is to encourage you to have faith in your convictions. If you did the research and you have faith in your trade don’t let the market or any of the naysayers talk you into selling or avoiding the trade altogether. Naysayers don’t get rich. If you are holding a great company and it gets hit you HAVE to double down otherwise you probably shouldn’t have bought the stock in the first place. Numbers FOLLOW they do not lead. The stock price is not indicative of the fundamentals of the company.
If you are interested in joining our investment club email us at firstname.lastname@example.org we are also launching our Investment Masterclass on 3/29 at the discounted price of $50. This is a $100 value and you will receive a copy of the book that comes along with the class just for registering. The class is limited to 30 seats so act now!