Don't Catch a Falling Knife

When a stock falls rapidly trying to purchase that stock before it has hit bottom is like trying to catch a falling knife. You may successfully catch the knife without cutting yourself, but you are just as likely to slice your hand in the attempt.

With the markets having sold off so much lately it is certainly tempting to purchase a stock that has fallen dramatically because now it is "cheap." That stock may be cheap and it may represent a great long term opportunity. However, if you attempt to purchase such a company in a market like this you could find yourself losing a lot of money in the short term.

Let's take Boeing (BA) for example. Last Friday Boeing was trading around $130 a share. That was a 52 week low for the stock which had traded as high as $400 a share less than a year ago. Even with all of Boeing's current 737 Max troubles the stock was still trading in the $300's a couple of weeks ago. At $130 this looks like a great bargain. As of this writing, the stock is trading around $101 a share. If you had bought in the $130's you would be sitting a significant loss in just a day or so.

Even if you want to call yourself a long term investor, sitting on a big loss in such a short period of time creates to problems. First is the obvious loss of capital. The second problem however is more disconcerting. This is the psychological problem of buying a stock that immediately drops a ton. You will feel as if you made a mistake and don't know what you're doing. You will fear losing all of your money even though Boeing is probably going to survive. You come to believe trading and investing isn't for you; that the game is rigged, etc., etc. If you don't think these feelings will apply to you or take a toll on you, think again.

What should you do? Wait. Watch. Then act. The stock will eventually find a bottom. The stock will then turn up and start a new uptrend. Once that has occurred then you can look to add a potentially great bargain to your portfolio. You will not catch the exact bottom with this approach (but you probably won't do that anyway), but you will increase your chances of picking a winning stock, making money and protecting you mental health.