Don’t try to time the exact bottom or top

As I have explained before, when I will initiate a position, especial for long-term, is not really determined by the price; rather it is largely determined by the trend and the price action in the context of its fundamentals. This is especially important for a stock when it is falling. A common mistake for amateur investors is that they always try to pinpoint an exact bottom or top simply based on the price of a stock. So if they like a stock and it is falling significantly, they will be very anxious and attempting to get in simply because they think the stock is very cheap and has hit the bottom because its price has come down so much. They just cannot tolerate to miss the exact bottom if the stock indeed turns around immediately. I know this mentality very well because I was there also and behaved as such exactly. But you know what? Trying to buy a falling stock is equivalent to trying to catch a falling knife. It often hurts, and likely hurts very badly! Regardless how low a stock price is, it can always further dropping till zero if the underlying company has significantly problems. No one can consistently pinpoint the exact bottom or top. And it is actually not necessary if you are not a day trader. I learnt this a hard way over years. I was lucky a few times to get the exact lowest entry price but most often I lost money by doing so.

Take a real example of mine. I once shorted a star company, Sirius XM Radio Inc (SIRI), in early 2000s. This company provides satellite radio services via paid programs. I remember at that time a star host joined the company, which generated a lot of euphoria for it. But its business model was really questionable since it was already extremely competitive in the radio business with abundant choices of free programs. So I shorted it when it was around $20. In a couple of months, it dropped to around $10. I figured it was cheap enough and might be at its bottom. So I covered my positions with a nice profit. You know what? It continued to plunge in the next few months till it reached its ultimate bottom at below $1. I didn’t lose money in this example but I could have made much more money if I hanged on.

Therefore, don’t buy a stock simply because it looks cheap by its price. You need to know if it is worth it in valuation. Buffet’s company, Berkshire Hathaway, is the most expensive stock in the world. Its A share is traded at $107,300 per share. But from the valuation perspective, it is very cheap actually and you should buy it if you can afford.