My interest in stock buying certainly picks up when prices decline. When else do we get to buy things at low prices?
Maybe other people panic, maybe other people sell. For me, low prices mean possible opportunities.
As previously mentioned, since no one knows what tomorrow’s prices will be, it is appropriate to be prepared for all eventualities. Things are down, but are they going down further, or are they about to jump back up?
Nobody Knows The Prices I’ve Seen
It is like trying to guess tomorrow’s weather, but without the meteorological reports. And weather reports, in my view, hold more true that stock predictions. Even assuming that tomorrow’s opening will be something like today does not tell us much about the rest of the day tomorrow. I must trust my own comfort level.
When prices decline and some stocks I follow reach that target number, I found only three choices:
1. Buy a little
2. Buy a lot
3. Don’t buy
As it happens, doing nothing (choice 3, “Don’t Buy”) is my most common reaction. I notice that if a stock has declined substantially over time, while it might be a bargain, it might of course decline further. How can I tell? Of course, I cannot. It is only a gut feeling that I can rely on.
On the Other Hand
There’s an old joke that the late Dwight Eisenhower once said he wanted to find a one-armed economist, because all economists he ever consulted with about potential policies always eventually said, “On the other hand…” The moral of the story, of course, is that there is no real certainty about future events, even tomorrow’s stock prices.
Dilemma
When I determine that a stock’s price is of enough interest to buy some, I am then faced with a dilemma: do I buy a little, or do I buy a lot?
Truth be told (and why not?), I have only gone the “buy a little” route thus far. Generally, there are several factors that lead me to this course of action.
Firstly, I am as susceptible as everyone to the recency bias problem. I see some low prices, but I cannot tell if these are low, very low, or incredibly low prices. Or even if I know they are incredibly low, there is always the possibility they will go lower. So to hedge my bets, I take somewhat smaller steps.
Secondly, most of the companies I am interested in do not suffer catastrophic declines quickly. Over the course of a bear market, they seem to decline slowly, not suffering the significant daily declines of the more volatile set.
Thirdly, it is only when stocks make major moves downward that there are real significant bargains in dividend investment-grade companies. For example, I did indeed buy during both the 2008-2009 Great Recession and the Covid 2020 declines, but I did not “back up the truck.” So I did miss taking advantage of some glaring oportunities. And these kinds of bear market opportunities do not come around frequently.
While clear in retrospect, in the midst of severe declines, clarity is obscured. Since predicting the absolute bottom is impossible, it always seems prudent to be cautious. And it is this cautiousness that later seems to be a form of timidity. Judging one’s past actions with the benefit of hindsight, even if just in the recent past, can be detrimental to one’s dispassionate analysis of current circumstances.
Second-guessing benefits no one except the internal critic.
How bad is your second guessing? Let me know here.
The illustration of Schrenck’s Bittern, a kind of small heron, is found in reed beds, marshes, and rice fields, is from Rivista italiana di ornitologia v.1-2 (1911-1913). Courtesy the Biodiversity Library of the Smithsonian Institution.
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