A myth of madness, nothing is more destructive to amateur investors than thinking that a stock trading near a 52-week low is a good buy. Think of this in terms of the old Wall Street adage, "Those who try to catch a falling knife only get hurt." Suppose you were to look at two stocks: A) Made an all time high last year around $50 but has since fallen to $10 per share. B) Is a smaller company but has recently gone from $5 to $10 per share. Which stock would you buy? Believe it or not many invest in the stock that has fallen from $50 because they believe that it will eventually make it back up to those levels again. Thinking this way is a cardinal sin in investing! The price is only one part of the investing equation (which is different from trading, which uses technical analysis). The goal is to buy good companies at a reasonable price. Buying companies solely because their market price has fallen will get you nowhere. Make sure you don't confuse this practice with value investing, which is buying high-quality companies that are undervalued by the market.
The term "falling knife" comes from an old Wall Street adage: "Never try to catch a falling knife." It means that it's both dangerous and foolhardy to buy a stock that's falling because chances are it's falling for a reason and will likely continue to do s
Hey Dan, I want to hear the background behind the old standard, 'dead cat bounce' -- I bet that's a good one!
Value investing would only come into a situation like this when the entire market was dour. Therefore if the whole market dropped in line with that original $50 stock, then one might be very smart to invest in it since the entire market would, one would imagine, bounce back from such lows. However, if the entire market is doing fine but this one stock was dropping from such heights alone then the market has singled it out as an exceptionally poor choice. That's the real difference. Those who bought into the DOW at 6,700 made a killing.
When a stock is in a down trend, never try to catch it. I always wait for them to hit a support and buy only when it bounce back from that support level.
I agreed with that. If the prices of a stock are falling, then it is risky to buy. It is better to wait for some time before investing in it.
