Markets are volatile. In some cases they are less and in other cases they are very much so.However we have only two choices either we go down to the volatility or we make use of it to make money.How do we do this?Buy good companies when they dip on bad news that is likely to have a temporary effect in the short-term, but either no impact or a positive impact in the long-term. Good companies almost always recover from temporary setbacks. A refinement to the strategy is to watch for the news that the stock market perceives as bad in the short-term, but in reality is good news for the long-term.
These are the four steps that investors can use on their own without help from analysts to apply this strategy.
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.