Everyone quotes the same strategy: buy low, sell high yet we often find it difficult to follow in the real world. Let’s look at a situation outside of the stock market for perspective.
You want to buy a new car. You’ve done all the research, and based on your needs you have determined that a new Lexus ES350 4 door sedan V6 is the perfect automobile for you. You then do your homework and find the best deal with the options you are looking for is $36,000 at a dealer near you. As soon as you have the money available, you go down to the dealership to buy the car. When you get there you find that the dealer has lowered the price on the very same car to $30,600, an unadvertised 15% discount! What do you do? Are you angry that the price is lower? Do you question the intrinsic value of the Lexus? Do you wait to buy until the price goes back up? Of course not. You thank your lucky stars, and jump on the deal.
The stock market often presents the same scenario. You do your research. You find an equity that you want to buy. You feel it is priced right, the fundamentals are excellent, and you decide to buy. On the day that you decide to make the purchase the entire market, or the sector, or perhaps just that security is down significantly for no apparent reason. What do you do? Why is it that we are so hesitant to buy when a stock that we like has gone down. On the other hand, how often have we chased a stock that is rapidly rising and find that ultimately we have bought it at a price significantly higher than we originally planned? I think the answer to both questions is one of knowledge and confidence. When the market is dropping it is fear that prevents us from buying at just the time we should. When the market is rising it is greed that makes us buy a rising stock even when it may have passed the point of a judicious purchase. However, if you have done the proper due diligence and you know the real value of an individual stock then if you see that it has dropped, you will likely buy more shares than you initially anticipated because your available dollars will buy more at the lower price. You will feel good and confident that you have made a good decision based on your knowledge of the underlying value of the stock. Similarly, if a stock you are knowledgeable about has risen rapidly, perhaps beyond where the fundamentals justify, you will probably wait until reason prevails and wait to buy until the stock settles back to a price in line with its true value.
Simply stated, if you have really done your homework, and a stock was truly a buy at a higher price, isn’t it a better buy at a lower price? Isn’t it odd that contrary to buying a car or almost anything else, our human nature causes us to want to buy when a stock is going up yet to hesitate buying after it has dropped. Knowledge is the tool that allows us to act with confidence and make the right decision even when our human nature (fear and greed) tells us to act otherwise.
Moral: Do your due diligence and know what you are buying and don’t let an irrational market fool you. Take advantage of it!
Visit the High Yield Dividend Stock Report for further articles and a regularly updated high yield dividend stock list: http://bihdividends.blogspot.com This blog is dedicated to assisting investors with their due diligence in the highly volatile and often misunderstood category of high yield dividend investing as part of a diversified investment program.
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