'humpback said:
... no real investor buys, holds, buys more when it goes down, buys more when it goes down, and rides a stock into the ground.
If toadstool thought it was a good buy at 30, why wouldn't he think it's an even better buy at 25?When the price of oranges falls, people rationally buy more oranges. When the price of Facebook stock falls . . . people should sell?
If the stock falls because something about the business has changed, it's time to reevaluate, of course. But the mere fact that the price fell, in and of itself, is not an argument for selling; if anything, it's an argument for buying more.
I like you a lot MT, but some of your analogies lately have been awful.
That analogy understated my point because sometimes you won't want to buy oranges even if they're a major bargain just because you're already too full. Oranges will rot, after all.I'll try to make the point a different way. Facebook stock is worth a certain amount based on its net assets, projected earnings, etc. If you're considering buying some, you should try to figure out exactly what it's worth. If its market price is above what it's worth, you should not buy any (and should possibly sell if you already have some). If its market price is below what it's worth, you may want to buy some (and should not sell unless you need the money).
Assume for a moment that the company's net assets, projected earnings, etc. remain constant in the short term. Suppose the price drops from 30 to 25. That is never, in itself, a sell signal. If you were going to sell at 25 because its value is lower than that, you should have already sold at 30. If anything, the price movement is a buy signal: if you put its value at 27, it just went from being overpriced to underpriced.
Obviously, it may not be true that the company's projected earnings have remained constant. Maybe something happened to lower forecasts. In that case, all bets are off and you have to reevaluate what the stock is worth. But that's due to
outside factors, not the drop in its stock price. The drop in stock price,
in and of itself, can never be a sell signal. In and of itself, holding everything else constant, a drop in price makes the stock a better buy (and a worse sell) than it used to be.