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A Falling Knife

Stocks rise. Stocks fall. A stock that falls too quickly is a falling knife.

Catch a falling knife just right and you grasp its handle. But if you miss by just a little bit, you get cut.

Stocks that are falling too fast can cut you in just this way. Why? Because the momentum of the market is so strongly against the stock.

Think of it this way: If you are to successfully buy a falling stock, your timing will have to be impeccable. Are you really that good or will the law of probability work against you?

Even if you time the bottom just right, the stock is still likely to stay in the doldrums for quite some time before starting to rise sure and steady. It's better to wait.

Be very cautious when contemplating buying a stock that's becoming cheaper by the day. Cheap could become cheaper.

When momentum goes against a company, it is better to wait before buying. If you will wait until your cheap stock establishes price stability again, you are far more likely to be successful.

It makes sense. It's really a 3-part story. The beginning of the story is the fall of the stock. The middle part of the story is the price stabilizing for quite some time and the stock price stuck in a sideways trading pattern. The fairy-tale ending to the story is the stock price rising again to stellar heights.

Please don't forget the middle part of the story. It is the most important part. Let the stock price stabilize for a while before buying into the stock.

If you do, you'll be more successful than most people.

©Edward Abbott 2003