What Steps You Should Take When Your Stock's Price Falls
by Wayne A. Thorp, CFA
In investing there are a few universal truths. One of them is that at some point, a stock's price will fall. There are myriad reasons why a stock's price falls and it is up to you to determine the cause. By identifying why the price is falling, you are far better equipped to decide if it is time to sell your position or if the fall in value presents an opportunity to purchase additional shares. The key is neither to react every time a stock you own dips, nor to become so emotionally attached to an investment that you stay with it no matter what the news.
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The decision to sell a stock should be similar to the decision to buy a stock. But the price paid for a stock must be put aside when deciding if it is time to sell. The sell decision should focus on a company's future prospects and fundamentals relative to its current stock price. If the reasons for buying the company—i.e., its fundamentals—have not changed, then there may be no reason to sell. Many investors lose sight of this and allow their emotions to dictate their sell decisions.
When you look at stocks that are declining in price, often you will find recurring themes that, once identified, can help you decide what your next step should be. These themes are typically related to one of three things: market movement as a whole, industry action in which the firm operates, or firm-specific issues. In this article, we will discuss some of these themes and the steps investors can take in the face of events. Be mindful, however, that it is not always apparent that the fundamentals of a company have changed. The key is to understand what is driving the price of the stock. If you are not able to identify why the price is falling, perhaps it is best for you to exit your position.
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Discussion
Mr. Thorp sounds like an economist; " If it's not this, it could be that, or it could be something else, or maybe something else, etc., etc." I was so overloaded with information that by the end of Thorp's article I thought my head was going to explode.
I liked the guy who runs Investor's Business Daily: If it goes down 8-10%, don't screw around, sell it. There are plenty of other good stocks out there. Buy one of them.
posted about 1 year ago by David from Pennsylvania
David, you seem to be advocating a rather robotic action policy. What if that 8-10% decline presents a great buying opportunity (e.g. BP during the Gulf 'disaster')? Thorp does point out the analytical aspects one could follow.
On the other hand...you may be better off doing it your way!
posted about 1 year ago by Dimitri from New Jersey
To reinforce Dimitri's comment, I believe BP Stock dipped briefly to $30 a share immediately after the Gulf disaster. But within six weeks, BP Stock had recovered to $45 per share - a 50% gain. Of course it's easy to be a 'Monday Morning Quarterback.'
Another recent example of a respected company's sudden stock plummet is Cummins Industries (CMI). Immediately after a report stating that CMI's accounting standards were more Questionable(?) than 90% of all companies, the stock took quite a hit. But CMI stock price has strongly recovered, (regardless of CMI acct'g standards).
I'm beginning to think that when a respected Industrial company 'stumbles' - it may represent a Great Buying Opportunity.
posted about 1 year ago by John from Ohio
Thanks Wayne Thorpe. You must be right be cause you advocate just what I am already doing. Still, it's nice to be reassured.
posted about 1 year ago by J from Pennsylvania
