“Buy now because it’s ALL cheap!” This is a sentence we have heard hundreds of times and it must be said that the basis is correct. In the markets, you should buy when a stock is cheap and sell when it is expensive, Easy? Yes, but not simple.
Many small investors with little travel on the stock market think as follows:
Stock A a year ago was worth $20, today it’s worth $10. The small investor hastens to attribute this fall in price to the crisis, to the slump of the sector, to the inability of others to see the bullish potential of that multinational, etc… But there’s one thing you don’t take into account, why was that action worth $20 a year ago? It is not because of the crisis, the crisis is a consequence of the reason why it was worth 20$ the previous year, the real reason is a bubble, speculation, or price inflated by a false feeling of growth and well-being, call it what you want.
But well, the small investor is on the sidelines of all this and will make a lethal second step, the world’s biggest stock market fallacy will say:
“Man, a company this big and solid will sooner or later be worth $20 again.”
We could find a few thousand graphics with prices that have been quietly 3 or 4 years that have not been touched and may never touch again. Never fall into this fallacy, prices need not return to the levels of a few years ago, and if they do inflation and opportunity cost will have eaten away your investment in an overwhelming way.
To give you an example I propose a TEST:
Company X is listed at $300, 5 months later it is listed at $100:
- a) Buy shares because 100$ is cheap because it is three times cheaper!!
- b) Do not act because the stock has lost 66.6% of its value.
Company X is now listed at $50, what do you do?
- a) I buy shares because now company X is 6 times cheaper than before and clear, sooner or later we will be back to 300$ or more. I have also read some very positive news for the sector and an article where they leave this company as the one with the greatest potential.
- b) You are still on the sidelines, although everywhere you read that this action is a real bargain, Who would be the fool who would not buy at such a low price?
The action keeps cutting prices and now it’s only worth 5$ (Maybe I’m already exaggerating, right?)
- a) Man, at 5$, if before it was worth 300$ this is a safe investment, the day that this goes up I will retire directly.
- b) There is no sign of the price that the stock wants to go up and even knowing that the stock now “only” is worth 5$ you decide not to buy and let your friends laugh at your poor eyesight to invest in “safe securities”.
Finally, the share price is $1 What do you do now?
- a) You laugh and think “But how exaggerated, how will it cost $1 a share that was trading at $300?” “If this is like saying that Google quotes $1!”
- b) You’re still on the sidelines, we don’t have anything to buy even though the value has been devalued by 99.9% of the initial value and it looks like it can’t be worse.
Well, gentlemen, the story ends with quotes in the area of $0.2 or what’s the same, the price of 4 chewing gum per share.
Any one of you who has opted for option A in any of the cases would be almost bankrupt right now. Imagine the friend who bought 10000 shares at 1$ (10000Acc * 0.2$= 2000$). It has lost 80% of the money, nobody can stand a loss of this size, and surely in the 50-60% of losses, most of us would be out of the market complaining about the crisis, the governments, and the manipulation of the market.
I’m no longer talking about who bought for $100 or $50 by making a “long-term investment,” you can imagine that he will never see his money again. Well, maybe I was a little over the top when I said that the price could drop from $300 to 20 cents, something like this would never happen on the market… Would it? Remember, always use a system with technical foundations and operate with knowledge, never open an operation if you do not have clear where to place your Stop Loss.