Michael Kors Holdings Ltd.: Catching A Falling Knife?

Wrtitten by Charles Mizrahi, Insider Wealth Alert

“Everyone likes buying a bargain, but catching a falling knife is no fun at all.” -Wall Street Journal, January 21, 2016

Buying a stock at a bargain price AND catching a falling knife, are joined at the hip.

Who wouldn’t want to buy a stock while its price is plunging…and see the price pivot and soar higher? Unfortunately, buying at the bottom bid and selling at the highest offer—when they do occur—are outlier events. Many times, a bargain price quickly become a bigger bargain in a falling market.

Bernard Baruch warned: “Don’t try to buy at the bottom and sell at the top. This can’t be done—except by liars.”

Buying stocks when they are trading below their intrinsic value, has made fortunes for many investors. Yet knowing that, many investors have trouble pulling the trigger, especially in falling markets. There seems to be something in human behavior that prevents people from wanting to see an unrealized loss on their brokerage statement.

However, there is a distinction between buying a stock at a bargain price and catching a falling knife.

When buying a stock at a bargain price, an intelligent investor already has done their homework. They have an idea what the intrinsic value of the company is, and given a margin of safety, they are quite confident that they are buying a dollar bill for .60-.70 cents—assuming they did their research. If the price of the stock heads lower, it creates a bigger bargain and a lower risk.

How can buying a stock with an intrinsic value of $50, be more of a risk at $25 then it was at $30?

On the other hand, catching a falling knife is a bit different—in that case the investor has no idea what the intrinsic value of the stock is, and any decline after they purchase it, is seen as a mistake…or being too early. In a nutshell, they are trying to trade based on the emotions of the crowd.