These are the four steps that investors can use on their own without help from analysts to apply this strategy.
- Start with a company that has a good name in the market. The reason is that good companies tend to bounce back.
- Evaluate the bad news to see if the effect of the news is either temporary or misunderstood by the market.
- See how many analysts follow the stock, and make sure that the vast majority of the analysts downgrade the stock. This is important because downgrades cause weak hands to sell the stock. Typically you will want to buy only after such selling has taken place.
- Buy the stock if it meets the above criteria. Keep the quantity small in case you are wrong and slowly build a position as you gain more conviction.