Stocks that Go Up May Stay Up or Not
In the stock market, an old saying is often corrupted into: a stock
that goes up will go up forever and a stock that goes down will
continue going down.
Or, if youre a real optimist: a stock that drops like a rock will
bounce back tomorrow or soon.
In either case, investors lock their minds into concluding the
movement in some direction of a stock sets its course for the future.
Buying Stock
This explains why they have no problem buying a stock that has just
run up 45 percent and assuming it will keep growing at that rate
forever.
Investors read about a stocks rapid rise and want in on the action.
Unfortunately, if they dont do their homework they may not know that
the stock has been run up way past its intrinsic value and it set up
for a major sell-off as investors who got in early take their profits
and run.
A stock that shows a period of rapid growth seldom maintains that same
rate for an extended period. If the stock is pumped by the rapid
growth of the company, it may be hard for the company to continue at
the same pace. The larger the company gets, the harder it is to grow
the company by significant percentage increases.
Selling Stock
This mindset also explains why investors dump a stock at the first bad
quarter or dip in stock price the stock must surely be headed downhill
forever.
If you dont know the companys business, it is easy to get spooked when
a few bad numbers show up on quarterly reports. However, if you know
something about the company, youll understand the numbers better and
be able to decide whether a poor quarter is just a bad quarter or the
beginning of bigger troubles. One bad quarter is usually not a reason
to dump a quality stock.
However, you dont want to be blinded to a companys faults. If the
company has significant problems that dont seem to be addressed by the
management, you shouldnt hold on with the hopes that things are going
the change. Companies do pull out of tough spots, but you need to be
realistic about those chances of it happening.
Conclusion
Dont get caught in the trap that just because a stock is headed one
direction means it is locked onto that path forever. One bad quarter
is not the end of the world, however a consistently losing proposition
of a business usually wont improve with extra volume.
