There has been sort of a rampage for many investors out there seeking support for their existing or potential share purchases. Most prominently, people are asking if sectors affected by Covid-19 are worth investing in right now. The truth is whether there are replies or not, no one truly knows when or how the markets would recover. As such, it would be good to track the progress of the markets and shares in your watchlist. However, it will be unwise to buy into a popular decision because it might be a bull trap or a short-covering. In this post, we will explore foolproof methods of investments and the reasons behind this methodology during this period of fear and uncertainty.
The market is after all “irrational”
Before trying to make sense of the situation with logic and reason, remind yourself that the market is filled with greed and fear. And both greed and fear are not derived from logic and reason. Therefore, before you expect a reaction in a market, you should prepare yourself for the unexpected. In such cases, thoughts that we should be grounded on will keep us steady and not sell due to an unexpected fallout. Instead of pulling out your capital during a dip, review your position and decide if you should accumulate instead. This will help you average down on your holdings and potentially increasing your returns over time. In fact, it will always make more sense to accumulate at a lower price but the catch is that prices only fall greatly when there is fear affecting the majority.
Why must you buy more when the market is fearful?
Market sentiments are more self-fulfilling than we think. This means that fear spreads like a bush fire throughout and triggers massive selling. The stance that we should all take is how bad is the actual impact on the company’s business. Additionally, we should also consider the future of the company after the fear is gone. This will allow us to determine the fair value at the point of rebound and its future value in specific time frames.
Example
| Major Support (Using Monthly Chart) | $2.37 |
| Current Price | $2.57 |
| Price after rebound (Estimated) | $2.70 |
| Future Value (Estimated) | $2.84 |
From the table above, we are able to see that the potential for upside is substantial and the room for prices to drop is also within a comfortable range. Therefore, if the recovery will drive the business to get back on track, investing now might be a good decision. The next question addressed would be how should we decide if we should buy more, hold or sell.
Buy more, Hold or Sell?
Too many people are asking about this and I feel that everyone should base their decisions on how much they have to lose and how long can they hold. It sounds simple but it actually is simple. The whole idea about buying shares is to subject your capital to market fluctuations that result in potential losses or gains. The main differentiator between investment and gambling is that investment decisions are based on logic. That said, the market is still largely irrational and sometimes can be overwhelmed by emotions, greed, and fear. During such times, investors should stay resilient and respond to the situation in a rational manner. The response of whether to buy more, hold or sell will be determined by how much you can afford to invest, how long you can afford to invest and the amount of paper losses you are willing to make.
Closing Thoughts
The main crux of this post is to emphasize that only time can tell if the decision you make is right or wrong. That is unless you are gambling and/or swing trading with high volumes and short durations. Also, instead of asking for others to support your decision, do exercise your own agency and discretion on your own investments. Lastly, do understand what constitutes a true genius in the industry. In other words, do not be enticed by someone who gets it right without the ability to explain his or her point of view. Instead, follow other’s perspectives only when they are able to properly explain their stance based on logic and reason. This will help ensure that even when things go south, you will less likely to feel fear or regret even after careful considerations.
