Benjamin Graham once wrote that the short term fluctuations of the stock market are like voting: everyone wants to weigh in on what he or she thinks a stock will be worth in the future. He went on to write that, in the long term, the stock market reveals what companies are actually worth.
Yet it'll happen to you: you find a great company with a stock you think will increase in value. You buy it. Then the price takes a tumble. What then?
Companies that make money stick around. Companies that don't make money go out of business. Over time, great companies pay off handsomely for their investors.
What Makes Stock Prices Go Up and Down?
How do stocks go up and down? People trade for many reasons! Perhaps a large investor sold a lot of units. Perhaps it's the day after an ex-dividend date. Perhaps there's national or global uncertainty for the industry or sector. Perhaps automated stock trading run amok dropped stock prices. Perhaps it just happens every now and then.
These daily changes are only mildly interesting, unless you want to maximize the value of every trade you make. Try to avoid that; don't get greedy. Over the long term, stock prices rise as the value of the businesses they represent increase.
What Should You Do When Stock Prices Go Down?
Investors may have a thousand post-hoc justifications for why any day in the stock market turned out like it did. You can't make a rational story out of daily fluctuations.
Instead of worrying about that, spend your time looking for good stocks. A flash-in-the-pan stock where people are excited because they think other people want to buy it is risky; you could end up holding the hot potato when the market stops. Good stocks hold their value over time.
A Stock on Sale is an Opportunity
Maybe we're thinking about price dips all wrong. Maybe sometimes good stocks go on sale. If so, that's an opportunity. Remember: the price you pay for a stock governs how much money you can make. If you buy a stock on sale, you improve your chances of making a good profit.
Maybe this feels contrarian ("especially in economic views", ha!); this is a test of your patience. If you've found a good company, can you wait until the price is right before you buy it? Can you wait, even if everyone else is buying and pushing the price higher and higher? Can you wait patiently for a sale?
Can you make a portfolio of stocks you'd like to own and wait, patiently, for them to become great opportunities? Given the choice to buy stocks now or wait for a sale, do you know the price at which you'd like to own a good company? That's a question of discounted cash flow analysis and your margin of safety.
If you can find the right price and practice the discipline of investing only at safe prices—you will have become a wise (and successful!) investor. Visit our stock analysis section to get started.
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