Friday, August 12, 2011
Following the crowd in the stock market can lead to disaster if you're not careful. Panic buying or selling can push stock prices beyond reason.
The crowd-following problem seems worse when the markets are down and the mood is pessimistic, people tend to sell even if there is no specific reason to let go of an individual stock.
This common trading mistake costs investors dearly. When the talking heads on television and the wags in print and online begin talk of doom, many investors dump their stocks in favor of cash or other "safe" investments.
As soon as the same crowd gets excited about the market again, the cash investors rush back to the market and buy stocks.
The problem with this approach is that the investor is frightened out of the market when prices are depressed and lured back in when prices have rebounded. In other words, sell low, buy high.
Your best defense against a market that slumps dramatically is to have a well-diversified portfolio that contains an appropriate amount of risk for your financial condition. This alone won't protect you when the whole market dives, however it will position you to ride out the slump and be in good position for when the market rebounds.
The thoughtful investor always asks why the price of a stock is moving before making a decision.
• Has something changed in the company?
• Has something changed in the company's primary market?
• Has there been a negative or positive regulatory or legal change?
• Is there an underlying change in the economy?
These are not all the questions you should ask, some will be specific to the industry or sector, but you get the idea. When you can find nothing in the answers to questions specific to the company, you look to the market.
Is this stock dropping (or rising) because the overall market is moving dramatically in that direction? It can work both ways, although a down market seems to depress overall prices more than an up market raises overall prices.
Shopping at Discounted Price
If you are looking to add to your portfolio, consider a down market a great shopping opportunity. A thoughtful investor is going to buy on the potential of a company and if he or she can pick the stock up at a discount so much the better.
This investing approach takes some courage and confidence in your ability to distinguish between a stock price depressed by a down market and a stock that is fundamentally flawed. You also must be prepared for further declines if the economy continues to slide.
If you have at least three to five years before you will need to begin cashing in your holdings (at or near retirement), you may be able to ride out an extended economic downturn. However, if you do your homework, you'll find bargains in down markets that may reward you handsomely in the future.
Don't be frightened off a stock just because the overall market is sour. If the fundamentals of a company are solid, a down market may be a great time to do some discount shopping. A fundamentally sound company will likely be on the leading edge out of an economic downturn.
Saral Gyan Hidden Gems (Unexplored Multibagger Small / Micro Cap Stocks) outperform Small Cap Index by 22%. Hidden Gems last 10 recommendations (from Sept 10 to June 11) published on monthly basis give average returns of 7.30% compared to negative returns of -14.75% of Small Cap Index.
We suggest our paid subscribers to add Dec 2010, Feb 2011 and June 2011 Hidden Gems during recent stock market correction. Its an opportunity to add these multibagger stocks as fundamentals are still intact and now trading at very attractive valuations. These companies have posted good Q1 results (except Hidden Gem - Dec 10 issue) which exceeds our expectations and have the ability to make strong northward move when stock market find stability going forward.
Look for Bargains during Recent Stock Market Correction