Effective Advice For A New Generation of Investors

CATCHING A FALLING KNIFE

One of the most common mistakes made by inexperienced investors is trying to "catch a falling knife". This is a habit, common among new investors, of buying stocks that are in "freefall", and it's a bad idea for an investment strategy. Unfortunately, it's common even among old and experienced investors. I have to admit that I've even made that mistake myself.

There are two primary approaches to investing: fundamental analysis, and technical analysis. At my firm, we generally fall into the fundamental camp, since we evaluate stocks based upon their valuations, rather than looking primarily at their short-term price movements. We take this direction because we believe this provides the greatest potential for long-term success.

Just looking at the fundamentals of an investment, however, can limit an investor's profits and lead to some unpleasant positions. This is because there are real limitations to buying a stock as it falls. You may purchase a stock that looks great at $10, only to see it fall to $5. If the stock rises again to $20, you may have been "right" to buy at $10, but maybe you weren't "right enough". Buying at $5 would have yielded a 300% return, while you settled for only 100%. Furthermore, if you thought that $10 was a reasonable price, you might have saved time by buying it on the way back up instead of on the way down.

Let's face it: buying a stock that is in mid-fall is not a pleasant experience, and it isn't difficult to come up with a variety of other strategies that will bring better results.

Still, we shouldn't avoid all stocks that have dropped. In fact, studies show that investors who buy stocks that have fallen hard, tend to outperform the market on a regular basis. In fact, this "bottom-fishing" strategy can provide one of the best performance levels of all, but missing out on these opportunities can be costly.

The decision then is not whether to buy "fallen angels", but when. This is where a bit of technical analysis skill comes in handy. Unless you're willing to buy any piece of junk that happens to have good price momentum, technical tools can't really tell you which stocks to buy. But they can lead us to a better understanding of timing. Once you select a good investment based on fundamentals, it is time to decide when to put the money down. A good first step: watch for a positive movement on good volume before committing. As long as the stock is dropping, there is a good chance you may get it at a better price. Better to wait a few days (or weeks) to assure your purchase is timed right. There's no advantage to buying before the time is right, even if the choice of stock is ideal. In this case, patience really is a virtue.

Remember: don't try to catch a falling knife - pick it up after it hits the floor!

R. Scott Pearson is an investment advisor, writer, editor, instructor, and business leader. As President and Chief Investment Officer of Value View Financial Corp., he offers investment management services to a wide variety of clients. His own newsletter, Investor's Value View, is distributed worldwide and provides general money tips and investment advice to readers both internationally, and in the U.S.

Prior to founding Value View, Scott edited the Pearson Investment Letter for eight years, and served as a Registered Investment Advisor for Pearson Capital Management. His newsletter articles and recommendations have been reprinted in other leading investment publications, including Investor's Intelligence, Bull and Bear and the Dick Davis Digest. In addition, he has written columns and articles of general interest for various newspapers, covering a wide range of topics from investments and IRAs to mortgages and credit issues.

Merck Investors Can Sleep Easier (Not Easy) DailyFinance By Brian Orelli, The Motley Fool Posted 3:34PM 02/06/12 Investing Merck (NYS: MRK) said today that its insomnia drug suvorexant had passed two phase 3 trials, putting it on track for an FDA filing this year. But that doesn't mean investors can sleep ... and more »

Investments for Income Lovers Motley Fool With interest rates at historical lows, folks are having a hard time squeezing any meaningful income out of their investments. While you don't want to go out too far on a limb in search of higher yields, there are some steps you can take to boost your ... and more »

Your Most Important Investing Decision of the Next 10 Years TheStreet.com And these are some of the most boring companies you can think of -- real-state investment trusts (REITs), pipeline operators and cigarette makers. But they all have one thing in common. As the chief investment strategist behind High-Yield Investing, ... and more »

Ask the Experts: What looks attractive for investors? Kansas City Star By CLAUDIA BUCK With the economy starting to perk up, investors are wondering where they should be looking next. Here with some recommendations is Glenn Kenes, managing director of investments with Barber-Kenes Capital Management Group in Auburn, ... and more »

J.D. Power and Associates Recognizes Merrill Edge(R) Call Centers for Customer ... MarketWatch (press release) For customers who prefer to invest on their own, Merrill Edge provides an online self-directed investing platform, with robust tools and resources to help them make informed investment decisions. "This designation acknowledges the strong commitment ... and more »

Investing mistakes even the pros make Sydney Morning Herald The best investors learn from their mistakes over time. And because I've made plenty of mistakes during my career, I'll optimistically say that means I've had lots of room for personal growth. Lucky you, then, for being able to learn from some of the ... and more »

TD Ameritrade Investor Poll: Younger Investors More Likely to Invest "More" in ... MarketWatch (press release) OMAHA, Neb., Feb 06, 2012 (BUSINESS WIRE) -- The European debt crisis, US unemployment, the housing market, and political uncertainty - a laundry list of issues that may be causing investors to think more cautiously about their financial futures. and more »

3 Dow Stocks That Jumped in a Down Market DailyFinance By Dan Caplinger, The Motley Fool Posted 7:06PM 02/06/12 Investing The stock market may have been down today, but things could have been worse. After falling nearly 70 points in early trading, the Dow Jones Industrials (INDEX: ^DJI) recovered to finish ... Investing In The Dogs Of The DowSeeking Alpha all 12 news articles »

Freedom Investing 2012 Forbes I've been discussing foreign freedom investing for a decade now. In the spring of 2010, I used the term “Ring-of-Fire” to describe countries with a high debt and deficit and suggested avoiding them. A year later, I revisited that advice and counseled ... and more »

Stockopedia

Are your investments at risk? 3 useful Red Flags: Altman, Beneish and Piotroski Stockopedia Warren Buffett's rule #1 of investing is “Don't Lose Money" while rule #2 is “Don't forget rule #1.” As with most Buffet aphorisms, though, the devil is in the detail of implementation. Clearly, though, one important way to prevent yourself losing ... and more »