“The time to buy is when there’s blood in the streets.” Baron Rothschild.
Hanging on the Intrinsic Value
The courage of buying falling stock depends solely on understanding the business and anchoring to its intrinsic value. The better the understanding of the intrinsic value, the more courage you get – to act or not to act.
One of the recent example is Meta, formally known as Facebook. Meta Stock fell 70% from its recent high.
In a sharp reversal, Meta Stock have gained 140% since November 2022.
Did you miss it? I sure did.
Should it be in Baseball or Stock Investing, you need courage to swing or act.
In the market, you need to act in a sweet time to take advantage of the market fluctuations. If you act early, you will suffer badly and your return will be low. If you wait too long to act, you will be a bystander watching the opportunity swing by. All you will be left with will be the regrets and some learnings to write an article like this one.
Courage to buy Falling Stocks
- Know the business
- Calculate the intrinsic value of the business. This is the only way to get confidence in buying the falling stocks. Force yourself to believe the market price is always wrong. This thinking makes you to calculate the true value of the stock. This mind game worked for me; it might work for you as well.
- Do a Destination Analysis, This is important to have your vision on the horizon.
- Psychology of Buying Falling Stock
- Act – Just do it! Keep a little margin of safety for your miscalculation and buy if the intrinsic value is greater than the market price.
- Buy in periodic interval (If you are intending to invest 10k, divide it equally by 10 and invest 10% in each month).
- Know that it is impossible to buy at the bottom, so just average it out.
- Loss Aversion – Accept the fact that stock price might fall even more from your purchase point. Don’t worry about the unrealized loss. In fact, this is the opportunity to buy it more even cheaper. Always remember that “When the stock price falls, the less risky it gets”.
- Fear of Missing out – Let go of the fear of missing out should the stock go up from this point. Look for another opportunity if this one goes away. If you shoot prematurely, your return will be low. Don’t shoot too often; Few big bets is the way to beat the market.
- Hold it patiently until the intrinsic value is achieved.
- If it has a longer runway, hold it even if it is overvalued in the short term.
- People are short term oriented. Distance yourself from the crowd and market forecast. (Get out of Herd Mentality – Unconsciously believing that everyone must be correct when the stock is falling.)
Let the investing be as mechanical as possible; Emotion is for family!
Another school of thought, I must say a proven one, is to hold the company in good times and bad times, assuming that you already own the stock. You need to just ride out the ups and downs of the market.
In the above example, if you didn’t look at the market for a trailing year, you will find out that the market has done nothing.
I particularly have trouble with this approach. My emotions always get in the way and I do stupid things, which are harmful for my wallet.
I am slowly distancing myself from these madness. I am taking a more lazy approach to investing.
I’ll let you know how this strategy is working for me.