There is a common belief that what goes up, must come down, and vice versa. This belief is prevalent not only in life, but in equity investing too. While in life, it may be true in some situations, in the stock markets, it must be viewed with skepticism.
Let’s first consider a stock that has fallen significantly over a short time span and is close to its 52-week low. Most amateur investors believe that this is a ‘good time’ to buy the stock. The purchase is carried out without digging in to find the reasons for the fall in price. Remember, the market is not mindless. The stock would have fallen due to certain compelling reasons with seasoned investors moving out quickly to cut their losses. Whenever you are inclined to put your money into such a stock, remember the adage, “Those who try to catch a falling knife only get hurt.” Let’s now consider a stock that has risen significantly and has reached its 52-week high. Again, investors may believe that the stock will definitely fall and would make a ‘good buy’ only then. In truth, the reason the stock would have hit its 52-week high mark is because of certain favorable developments in the business or the industry the company is a part of. In fact, there could be compelling reasons for the stock to rise further from here. Avoid the common myth that “Stocks that go up must come down”. The laws of physics do not apply in the stock market. There is no gravitational force that pulls stocks back to even. There are several shares that have moved from Rs.100 to Rs.500 in little over a couple of years. If you had thought that these stocks were going to return to its lower initial position, you would have missed-out on the subsequent rise to Rs.5000 plus over the next few years. Several stocks come to my mind: Bajaj Finance, Infosys, Hindustan Lever, Nestle etc. In any case, waiting for the stock price to fall or even buying at the current price without considering other factors such as the business, the promoters, the prospects of the company and industry, etc. would be foolhardy. Price is only one part of the investing equation. The goal is to buy good companies at a reasonable price.
It’s not that stocks never correct. The point is that the stock price is a reflection of the company. If you find a great business run by excellent managers, there is no reason the stock won’t keep on going up.
Several stock market myths emerge from the mother myth “Having just a little knowledge, because it is better than none, is sufficient enough for investing in the stock market.” Knowing something is generally better than nothing, but it is crucial in the stock market that individual investors have a clear understanding of what they are doing with their money. It’s those investors who really do their homework that succeed.
Don’t worry. If you don’t have the time to fully understand what to do with your money, then having an advisor is not a bad thing. The cost of investing in something that you do not fully understand far outweighs the cost of using an investment advisor.
Remember: “What’s obvious is obviously wrong.” This means that knowing a little bit will only have you following the crowd like a pig to the slaughter. There’s no free lunch in life: like anything worth anything, successful investing takes hard work and effort. A partially informed investor is as effective as a partially informed surgeon; he will only hurt himself and those around him.
Milan Sangani Milan is a veteran stock market investor and educator on equity investing. Connect with him on firstname.lastname@example.org