....buying a "bombed out" stock which was once a darling stock feels like a genius move for some.
....you're the genius buying a true bargain, while the market is selling it down causing it to make lower lows. You're either too early or the stock is no longer worth what it used to be worth.
....careful buying falling knives stocks. Fastest way to lose money, going against the tide.
by Michael Salvatore
A friend of mine (probably) made a mistake…
I was recently talking to a friend of mine about a big stock purchase he made.
Understand, this guy is not a big finance nerd like you or me. And what I’ve noticed is folks who invest casually and aren’t in the thick of it every single day tend to make two key errors that don’t seem like errors intuitively.
I get why people think this way. It’s an attempt to invest like Warren Buffett that, unfortunately, does not have the desired result. Oftentimes all this frame of mind does is help you miss out on returns.
- They buy individual stocks when they make big, headline-worthy down moves, thinking them suddenly “cheap.”
- They ignore stocks that go up very quickly, thinking them “expensive.”
Anyway, my friend made error #1.
He tells me he bought a bunch of stock in Intel (INTC) after its dismal earnings report back on Aug. 1, which sent the stock cratering 26% in a single day. Mind you, this was a few days before the massive rout that erupted in the wake of the Bank of Japan-induced deleveraging event.
I get why some investors think this way when they hear of this happening to a company like Intel. It’s been around longer than many investors have been alive. It makes central processing units (CPUs) that are standard in a ton of different computers the world over, including the laptop I’m typing this on and probably a whole lot of systems in the plane I’m flying on as I write this.
My friend, like me, is also a traditional nerd who likes to tinker around with computers and rightfully turns to Intel’s CPUs when he’s building one.
Suffice to say, looking at INTC intuitively, that drop looked like a fire sale. And if INTC had bounced in the four weeks to follow, I would eat humble pie. But one look at the chart and, well, I’m still hungry:
Not only did INTC not bounce off that massive drop, it sank lower… and ended the month down 28.3%. That’s even after a merciful 9.5% surge on the final trading day of the year.
You know what did bounce after the early August smackdown? Well, lots of stuff. But you could’ve kept it simple and used it as a buying opportunity in the SPDR S&P 500 ETF (SPY), which rose 3.8% over the same span.
The moral of the story here is that stocks usually sell off for a reason. Intel may make great products, but its business leaves a lot to be desired.
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