Read our latest October Month Edition, which talks about the mid-cap funds, the big question of staying or exiting Mutual funds & India's economy.

5. Emailyourqueriesonfinanceandinvestmentstoresponse@abchlor.com InvestGuideOctober2019 03
profile.Theaverageinvestorcannotresistthetemptationof
earningaquickbuck,hetakeshelpoftechnicalanalysis,
triestofindretracementlevelsandbuysthestockwithout
havingtheslightestideaofwhatheisgettinginto.Asmen-
tionedearlier,theknowledgebiasorIknowallcreatesthe
senseoffalsesecurityintheinvestorabouthisdecisionto
catchafallingknife.Whenthestockfalls50%ormore,the
investorinvestorassumesthat thestockhasfactoredallthenega-
tivesandthepricehashitthebottom.Hefeelsthatthe
stockcanonlymoveupwardsandwhenthestockcontin-
uestofall,insteadofexitingthestock,heconsoleshimself
andholdsonoreventrytoaveragemore.Theinvestors
actionisdrivenbyhopeandnotanyconcreteanalysis.The
decisiontoinvestisaemotionaloneandhasnothingtodo
withthefundamentalsofthecompany.
Itiscommonforinvestortotakedecisionsonemotional
scale,whenthepriceofthestockfallssharply,thefirstreac-
tionoftheinvestoristojumptobuythestock,hehasno
timetoreflectonthereasonsthatcouldcausesuchfall.
Theinvestoractsirrationallybecausehethinkshewillmiss
therallythatcouldbeginanytime.Thistypeofthinkingputs
him ondefensiveandhetakestheplungewithoutthinking
ofconsequences.ofconsequences.
Aninvestorbehaviourisalwaysirrational,whetheritisbull
marketorbearmarket.Intheshortrun,marketsmaygravi-
tateawayfrom thestock’struevalue,forexample,letus
assumethefairpriceofRelianceIndustriesLtd.IsRs.1300,in
thebullmarket,thestockpricecanhead towards1500
levelsandstaythereforquitesometime.Similarly,inbear
market,thepriceofRelianceIndustriesLtdcanfalluptoRs.
900900level.Inboththescenarios,themarketcanmovein
eitherdirectionandcantradeirrationallyintheshortterm.
Iftheinvestoriscarefulenoughtoanalyzethestockbeforein-
vesting,hecancatchafallingknifeandturnittohisadvan-
tage.
Asmentionedbefore,aninvestorshouldanalyzethestocksthat
hewantstoinvest.Inanybearmarkets,therewouldbeseveral
“fallingknife”opportunities.Inthefallingmarkets,severalblue
chipstocksbecomefallingknifes,andiftheinvestorfocuseson
accumulatingqualitystocks,hecanbuildagoodportfoliofrom
suchstocks.Sadly,insuchtimes,investorsusuallyrefrainfrom
pickingqualitystocksandfocusonstocksthatarecheap,I.e.
tradingatpennies.tradingatpennies.
Thebestwaytostayawayfrom “fallingknives”thatcantrap
theinvestoristocloselyobservethepriceofastock.Whenthe
priceofthestockfallssharplywithoutanysignificantbounce
thestockcanbetermedasafallingknifethatshouldnotbe
caught.Aninvestormustalwaysrememberthatstockpriceis
thereflectionofitsfundamentals,soifthestockpriceistrading
atdiscountorhasfallensteeply,therecouldbereasonsforthe
same,same,andtheycouldbeinternalorexternaltothecompany.
Forexample,ifthecompanyreportssubduedearnings,itcan
causewildswinginthepriceofthestock.Ifeconomicreports
arenegative,thestockpricecanfallsharply.Thereisnowayof
knowing whythe stockprice isfalling.Untilthe confusionis
cleared,investorsshouldstayawayfrom suchstocks.
Insteadofbeatingthebenchmark,theindividualinvestormust
focusonpickingqualitystocks.Wheneveryoufeelstrongurge
tobuythestock,holdonforfewdaysbeforeactingonit.Ama-
jorityofinvestorstreatinvestingasanadventure,andjumpto
buythestockpurelyonintuition.Theydonotcaretheresearch
thecompanyandinvestblindlyhopingtogenerateextraordi-
naryreturns.Amajorityofinvestorsareexcitedattheideaof
makingquickmoney.Whileitistruethatsuchstockscandeliver
stellarreturnssometime,amajorityoftime,itcauseslossofpre-
ciouscapitalfortheinvestor.
Aninvestorshouldaskhimself,“inordertopurchaseagood
stock,hemustconductproperresearch-includingfundamen-
talandtechnicalanalysis-hemustunderstandthedynamicsof
themarket,thenhecertainlyrequiresevenmorecomprehen-
siveresearchwhileinvestinginastockthatisfallingrapidly.
“Catchingafallingknife”thisstrategyismoresuitableforag-
gressiveinvestorswhohavecapitalandmoreimportantlyabili-
tytowithstandlosses.Theaverageinvestordoesnothaveabili-
tytowithstandlossesnordoeshehaveproperknowledgeto
dealwithsuchstocks.Hemustfocusonbuildingaqualityport-
foliothatwillbeatthebenchmarkinthelongterm.
Areyoualwayscatchingfallingknife?

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