If you want to know why a stock fell, you need to ask three questions. These three questions will help you pinpoint the reason and allow you to take action.
Those three questions are…
- Was it the stock?
- Was it the sector?
- Was it the market?
Was it the stock?
To determine if it’s the stock, simply Google the stock and see if there is any negative news such as a legal issue, a bad quarterly report, or the CEO says something stupid on social media. You can usually find bad news on a stock within one minute as bad news will typically show on the first page of a Google search.
If I find bad news with On Sale stock, I typically don’t react. The reason is, bad news with an On Sale stock typically doesn’t drive the stock down for long. The strong financials of the company typically take over and cause the stock to go back up. It can take days, weeks, and in some cases months but the stock typically does go back up.
Now in some cases, I’ve seen people sell On Sale stocks when they receive bad news but if the stock is still On Sale, the stock can quickly turn around and climb higher than ever before and in this case, the investors can miss out on gains because they sold at the wrong time. Your best option is to not react and simply let the stock go back up.
If you don’t find anything negative about the stock, that’s good news! This means the sector may be falling.
Was it the sector?
If the sector falls, try to find out what happened to the sector. Similar to bad stock news, I typically don’t react. The strong financials of the company typically cause the stock to go back up. Plus, an entire sector typically doesn’t stay down for long.
If you can’t find bad news about the sector, that’s more good news! This means the market is falling.
Was it the market?
If the market falls, this is going to sound crazy, but that’s exactly what you want! That’s the most exciting time for an investor. When the rest of the world is in panic mode, you should be smiling. Here are some recent events in history that presented themselves as great buying opportunities:
- Bear market of 2022 – Caused by multiple events including high inflation, Covid-19, and the Russia/Ukraine conflict. High interest rates were the primary driver. The market went down 19% in 2022 but went up 24% in 2023. If you bought some On Sale stocks in 2022, your returns in 2023 could have been much higher than the S&P 500.
- Covid dip of 2020 – Caused by the first variant. The market went down 30% in February and March of 2020 but quickly went to all-time highs a few months later. If you bought some On Sale stocks in February and March of 2020, your returns in 2009 could have been much higher than the S&P 500.
- The Great Recession of 2008 – Caused by the housing market crash. The market went down 38% in 2008 but went up 24% in 2009. If you bought some On Sale stocks in 2008, your returns in 2009 could have been much higher than the S&P 500.
Remember, you want the market to fall because that’s a buying opportunity!