What to do when they say “Buy the down” but the stocks keep going down
September 1, 2020, You’re here (NASDAQ: TSLA) shocked the market.
Capitalize on a stock market rally who drove Tesla shares up close six times in price since the beginning of the year, CEO Elon Musk had decided to cash in and recover additional cash to finance the future development of new Tesla models, and more powerful car batteries to run them, by selling $ 5 billion in Tesla shares. Tesla shares quickly plunged, falling 34% over the next week.
“Buy the dip!” Cried the analysts.
After all, Tesla was the leader in electric cars, the wave of the future. “Battery Day” was on the horizon, and shares of the electric vehicle maker would surely rally ahead of the event, as investors rushed aboard before all the wonderful things Elon Musk would say.
They were right about it … until all of a sudden, they were wrong. Tesla shares started climbing again until September 22, when Battery Day arrived, but then fell 15% in two days when investors decided Tesla’s news was not surprising enough.
So is it safe to buy the dip now?
In Tesla’s case, maybe. As the clear leader in electric car sales, Tesla has defied skeptics by posting four consecutive profitable quarters, according to the latest data from S&P Global Market Intelligence.
Plus, Tesla’s stock chart this year is truly a work of art. “Peaks” and “troughs” notwithstanding, if you lay down a ruler and draw a line between the nadir of the stock price at the end of March and Tesla’s closing price (after the most recent trough) on Friday, it shows still on an incredibly positive slope – meaning that investors who held the stock through thick and thin were amply rewarded for their patience.
But things don’t always go so well.
Take Tesla’s potential competitor Nikola Corporation (NASDAQ: NKLA), for example. After merging with a blank check company in june, resulting in de facto IPONikola’s stock went supersonic, first tripling in value, then doubling again, all within a week. But Nikola’s story since that exhilarating first week has been just a series of lows – and the investors who bought those lows have been badly burned.
Accusations that the company was “a complex fraud“The use of the purchased technology and the advertising itself with fake drive tests devastated Nikola’s stock earlier this month, ultimately cost the company’s founder and chairman, Trevor Milton his job Last week. And while it’s true that Tesla had his own share of such near-death experiences – and survived – there’s no guarantee Nikola will do the same.
Try “buy the dip” on Nikola, and you might end up catch a falling knife instead of.
What investors need to know
So … how do you know that the stock you see “soaking” is a good deal that will bounce back, and not a knife that cuts you?
The simple answer is: you don’t. Unless you work high in the company itself or have special experience and in-depth knowledge of the industry they work in, chances are you are guessing like the rest of us. .
And in that case, I would suggest that “buying the dip” might just as well hurt you as it helps you.
What’s the best way to invest? To consider average purchase with your investments. If you want to own $ 1,000 in shares for example, try to buy $ 100 of stock every month, for 10 months (or $ 100 per quarter for two and a half years – or whatever period you like).
If the stock you chose keeps going down, not investing all of your money at once will buy you more and more stocks with each purchase, so if the stock Is turn around eventually, your profits will be even more important. On the other hand, if your stock turns around sooner than you expected, or hoped for, at least you won’t have completely missed the mark. And your subsequent investments will be in a business that steadily grows healthier and more popular over time – which isn’t a bad thing at all.
You won’t know how things are going to turn out ahead of time, of course, but your chances of profiting will improve either way.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.