Something I’ve heard many times over my career is “Boy this stock is going up, I want to buy some” and of course recently “This stock is going down, I’d better sell”.
People in these situations are making decisions based solely on the price of stock. The presumption is that the stock price itself carries vital information about what to do. Is that a valid assumption? Let’s look at this idea in other areas.
We own a business and currently we’re being offered $500,000 to buy it. A year later the best offer we receive is $350,000. Do we then say “The offers I’m getting for my business are going down, I’d better sell”? Certainly we wouldn’t make that decision based on the price. We’d look at the business and see how it’s doing. If it’s ok, most business owners would say “Man, I’m not being offered much for my business, I’d better not sell”. This is the exact opposite of what many people do when stocks decline.
Ok, how about looking at buying a TV. A TV we want to buy was at $600, now it’s down to $400. Do we say “Wow, that TV price has gone down, I’d better not buy it”? Does the drop in price mean it’s a bad TV? We have no idea, we’d have to research it to see if it’s a big sale, or something else. The price itself conveys no information.
People do not generally makes decisions about buying or selling a business or a TV based upon movement in the prices. Price changes convey little information. They may indicate something deeper, but that requires research. But many people don’t do the research when it comes to stocks. They instead get stampeded into buying stocks at market tops and selling out at market bottoms just because of price movements.
Don’t allow that to happen to you. If you aren’t an expert in stocks yourself, subscribe to a service like Value Line, or read magazines like Money or Forbes, or use mutual funds or an investment advisor to help. Don’t let changes in stock prices fool you into making bad decisions. Those price changes by themselves are not giving you enough useful information.