Catching falling knives

When others are greedy, be scared and when others are scared, be greedy

The most important lesson that I learned about the stock market was that when others are greedy, you should be scared and when others are scared, you should be greedy.

Although the current crisis is a big one, it is not really an unprecedented one and is certainly not one that can’t be solved.

The biggest emerging threat was that the credit system was getting choked and led to the drying up of funds for businesses of all sizes. Such a scenario has been avoided now, with the central banks all across the world taking concerted action and pumping funds in the banks and financial system.

The market always rebounds

I strongly believe that the market will rebound, like it always does and these times are great buying opportunities. As anyone who has been greedy when others were fearful, will tell you, the biggest challenge is determining, how scared others will get.

Dow Jones since 1970

As you can see from the graph, the market has went up and down several times during the last four decades, however in the long run, it continues to move upwards.

Buying in small lots

I bought some stock last week that is already 20% down and I am planning to buy some more this week that may still go down 20% in a week or two.

This is the problem with catching falling knives. You never know how badly they will fall and you may end up cutting yourself while trying to catch them. That is a problem that can’t quite be solved by timing the market. No one really knows where the bottom of the market is and if you wait too long, you will always find yourself sitting on the sidelines.

The best bet is to spread out your investible surplus and then keep buying lots of your favorite stocks. The one caution that I do maintain is to look at the cash balance of the company and compare it with the last few years. This is really easy to do, all you have to do is to go to Google Finance or Yahoo Finance and pull up the financial numbers of the company for the last few years. You can easily find out whether the company is cash rich or not.

This is the additional check that I perform to make sure that my companies are not only fundamentally strong in the long run, but cash rich in the short term as well.

So sit back, hold your nerve and enjoy the ride.

2 thoughts on “Catching falling knives”

  1. Pingback: Catching falling knives · Stocks.ExplainedOnline.Net

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