When a stock price go down, should you go and buy or not? Is it an opportunity or a trap?
If you are Warren Buffett follower, you will follow investor style, buy when market crash! However, this come with condition, you must only invest in those company that are solid with some sort of monopoly in their business, where the business will still grow in the next 10 years. If you have identify those five star companies, then yes, market crash is opportunities to buy them. (Some of those company in local Bursa include Ajinomoto, F&N, Heineken, Panamy, Carlsberg, Nestle, Dlady &,,,) In fact, you will hardly find them drop in price.
Other than those solid five star companies, there are many others in the market, and once a while you will find something interesting like below chart:
One no need to have Degree/ Master to read the chart, the kindergarten kid can tell you, currently this is down trend stock! (the above is daily chart, the stock name is Gtronic, listed in Bursa)
Last few days, a client want to "average down" this stock and he ask my opinion, as his average price was $5.05, that day the price was $4.50. Then I told him, this is NOT a good idea to buy more when the price still falling, but he told me, first he want to average down, second, he want to buy the "weakest stock" or falling most in terms of percentage, with the hope they could go up the most!
I feel sorry for this guy, yesterday's closing price was $3.80! Today, the price drop some more to $3.50. (while I am writing, market still not yet closed) How can one buy a stock and "hope" that stock price will move to direction where he hope. I really hope he can learn the lesson, one should only buy a stock when he see the direction up (up trend stock) instead of jump into a stock which still go down and hope it will turn up immediately. (how can!)
Of course, on that day, we did not know what happen when this stock fall to $4.50. We only came to know next day when they released their quarterly result where the profit fall by 78%. The news causing more investors dump the stock. Technically, on the 1st day when the stock price start to fall, one should immediately get out of the losses immediately. (act first and find out later, this is what trader do) Because if you don't get out, it would potentially double/ tripple the loss and it will take months to recover it.
My theory to all investors, try to buy variety of stocks which are at or near all time high is safer than wasting time on down trend stocks. Then monitor those stocks, let the profit run, once it start to move away from their record high, sell and take profit immediately!