Most would say buy an undervalued stock as it falls in price. But, what if it does not, and charges upwards before you are even onboard? I’m sure many of you have encountered such a situation, where you wait for the share price to drop a little more before buying but it never does and decides to keep rising ceaselessly without making any significant rebound.
How do you know when the stock you’re buying at an all-time high is still undervalued and not you falling victim to the Greater Fool Theory? We all know what happens to the Fool, and none of us want to be caught in that position. We sometimes encounter stocks that have already gone up so much, that we can’t help but feel that such stocks are probably already fairly valued or even overvalued. Coming from a Technical Analysis background, I often find it hard to convince myself to buy something at a high and hope to sell higher. Since I started out more as a swing trader than a speculator so it’s quite hard for me to overcome such a mental barrier to buy at a high and try to sell higher.
However, gradually I’ve learnt to appreciate that stock prices rise in tandem with consistent good earnings. Just as how I have convinced myself that low can get lower, I have forgotten to invert the situation and think about and justify myself that high is able to go higher!
Now, the tricky part is to distinguish if you’re the Fool paying at the high or someone else the Fool believing that because it’s at a high and thus falsely conclude that the stock is overvalued without conducting ample research, when it is clearly an undervalued stock.
Which are you?