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

---

Landlording 101, Tricks of The Trade

Looking Inside Your Tenant's Mind Basic Mind-Reading Report 101 for... Read More

Critical Investors Business Daily Responsibilities - If not Followed Could Cost You Millions!

When thinking about the investors business daily responsibilities in today’s... Read More

Useful Tips on Investing

Here are some useful tips on investing. When you make... Read More

A Secret Revealed: Why Most (Day) Traders Fail

The following perspective on (day) trading comes from my many... Read More

Using Divergences to Keep Out of Bad Trades

The American Football season just came to an end with... Read More

My Way Or The Highway: Give Your Financial Professionals A Good Talking To!

All this talk about Investing is encouraging lately. Over the... Read More

Retirement Is A Scary Proposition If Youre Without A Plan, And Running Out Of Time

Of the 75 million baby boomers nearing retirement today, many... Read More

Making Your Investment Dollars Work for You

Investments are scary for some people, especially those who have... Read More

Makin The Sauce

Let's face it, you're on a roll. After getting down... Read More

Forex Trading Best Practices

FOREX, the term for the FOReign EXchange market, is an... Read More

Before You Start Investing

There maybe several reasons why you to want to invest... Read More

Expand Your Pool of Investors for Your Company

If you own a company that sells complicated products and... Read More

Investing for Retirement - Not an All or Nothing Play

In 1519, Hernando Cortes, beached on the shores of unexplored... Read More

Foreign Investing - US Investors Still Missing Out?

Investors are still too slowly realizing what the academics have... Read More

Day Traders and Swing Traders and Options? Maybe!

Typical day traders and swing traders look for stocks with... Read More

Angel Investors: Who They Are & When Are They Appropriate

Angel investors are individuals who invest in emerging business ventures.... Read More

Profitability And Stock Turn Rate

The inventory of the typical store represents the largest single... Read More

Asset Allocation Lessons: The 70% Inflation Solution

For investors only... and for speculators who need to invest... Read More

Forex market offers opportunity and information

The forex market is what is called an international exchange... Read More

Find a Methodology and Minimize Investment Madness

There are many reasons to be investing these days, and... Read More

Approaches to Investing

Here is a small summary of the three major approaches... Read More

Is Starting A Business For Me? What To Consider Before Starting A Business

Do you have the right temperament?Starting a small business is... Read More

Global Markets: A Window on the World Economy

Expectations drive the market. Every stock price is driven by... Read More

Buying a Home - Your BIGGEST Investment

This column has often focused on intangible investments like stocks... Read More

Love The Thrill of Risk? Invest in an Annuity!

With the stock market in steep decline, people are looking... Read More

Art Investing for a Financial Future

When we think of investing we probably conjure images in... Read More

Rules of Simple IRA Your Business Needs to Know

A Savings Incentive Match Plan for Employees plan, better known... Read More

It?s Not the Size of Your Bank Account

You might think that if you win the lottery or... Read More

DXPortfolio: A Great Passive Investment of 25% to $40% per month

First, I need to explain about e-currencies or digital currencies.... Read More

The Conflict of Interest Game

Disgruntled investors are going after Wall Street once again, this... Read More

Investing and Understanding What You Buy

"There is nothing more frightful than ignorance in action!" Johann... Read More

Going Offshore For Asset Protection

There are a number of key reasons why individuals and... Read More

Short Term Savings Products

When you invest, it simply means that you are putting... Read More