During bear markets, many investors try to be the hero and try to pick bottoms in stocks. They buy stocks that are declining rapidly in value in the hopes that they will buy at the bottom of the market. This article outlines the danger of the bottom picking strategy.
Dont Catch Falling Knifes
As the bear market progresses, many investors will be tempted to buy stocks that are declining rapidly in value in the hopes of picking a bottom in the stock. This technique is known as catching a falling knife for the simple reason that it often leads to injury on the part of the investor attempting this technique.
The simple fact is that the most likely outcome for a stock that is declining in value is for the downtrend to continue. In fact, it is not uncommon for some stocks to decline to close to zero during a severe bear market. This is because during periods of weak economic growth or recession, some companies will not survive leading to a complete loss of capital on the part of equity investors.
A Better Way
A better way to profit during bear markets is to buy stocks in companies whose shares are enjoying uptrends. It can be that despite the general downtrend in stocks that some companies in some industries are bucking the overall trend. These are the companies to look for and invest in. Let someone else get burned trying to pick bottoms in declining stocks.
