"What’s wrong with it?” is a question that first-time investors (and some seasoned ones) have a tendency to ask when a stock goes down.
The full question is, “I just bought the stock last week, and now it’s going down! What’s wrong with it?” The actual problem may be the company, it may be the market, or (most likely) may be the question itself.
When a stock drops, the first thing to consider is what the general market is doing. If the market is rising and your stock is dropping, it is likely that something is indeed wrong with the company, especially if the selling continues for more than a few days. On the other hand, if the whole market is dropping and yours is dropping along with it, there is nothing necessarily wrong with the stock you purchased. But, a decision is necessary. And you have to ask yourself a couple of questions before making that decision.
Question One: Has the company changed?
There should be some good reasons why you initially bought the stock. Hopefully, most of these reasons are related to the company behind it. If you bought a stock only because the chart looked good, you’ll likely lose money. If you bought the stock because the company has steady earnings, low debt, great return on equity, reasonable P/E ratio etc., and the chart looked good, you should be just fine. If the reasons you bought the company still apply, strongly consider keeping the stock.
Question Two: What is the state of the economy?
There’s an expression in investing: “Don’t try to catch a falling knife.” If the market begins falling from a peak, and you have reason to believe that the entire market will continue falling for an extended period of time, you should seriously consider selling the stock and buying it back later. No matter how good your stock is, if the entire market is falling, yours will likely fall with it. On the other hand, if you are not 100% sure (I repeat: 100% sure) that the market will be significantly lower a month from now than it is today, keep the stock.
Question Three: What is the state of the industry?
Have their been any rule changes or significant developments that have impaired the moneymaking potential of the business? Have their been any adverse political developments? If there have been changes, find out about them and assess their impact yourself – do not rely on others to do so for you. Emotions tend to run high in such situations, and emotions have no place in investing.
The fact is, stocks of good companies drop all the time. Just because a stock price drops does not necessarily mean that the stock is “bad.” In fact, if the price has dropped significantly, and the company still has all the great qualities that made you buy it in the first place, consider buying more. Many a fortune has been made by purchasing under-priced assets and having the patience to wait.
“What’s wrong with it?” is often just a way of saying; “I’m overwhelmed with the human fear of losing money, and have no confidence in my original decision.” If this applies to you, take a deep breath and re-read this article with your stock in mind. Then make a decision.
If you still feel overwhelmed, sell your stocks and get out of the market, forever. Not everyone was meant to own stocks. To make money in the market, you have to not care about money.
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“I think that if any reader of these chapters is convinced – really convinced – he cannot master the market, a great deal has been accomplished, because the great majority will fail in the market, & it’s worth dollars and cents to them to know it.”
Gerald Loeb, The Battle for Investment Survival
