Is it a good idea to invest in a stock that went down rather than up?

With all respect to Quorans who answered yes, I would say no.

A stock could move up or down based on fundamental factors, technical reasons and overall market sentiment. Now going by your question, I assume you would want to buy a good company if its stock price has fallen. It means you have done some fundamental analysis and arrived at the conclusion that the company in question is fundamentally strong.

That’s great. But, what if Mr. Market thinks that the stock is overvalued? The stock might remain sideways for the next few months and in that scenario, you would end up falling into a value trap.

Always remember that a company and its stock are two separate things. While fundamentals may appear strong at a given point in time, it is not necessary that the stock will move higher in future.

For instance, one of India’s largest wealth creators, Sun Pharmaceutical Industries has seen its stock plummeting by ~65% since April 2015.

Sun_MarketSmithIndia

Now imagine, how your portfolio would have done if you had been buying this stock on every fall.

Let’s look at a different stock now.

Solid stocks tend to make new price highs every now and then and are seldom available at a substantial percentage below their 52-week highs.

Buying a stock just because it has dropped by x% does not sound like a good investment strategy.

Never buy a stock until and unless the odds are in your favour. And you can get the odds in your favour by doing both fundamental and technical analysis as well as evaluating market condition.

One unique strategy that takes all the above factors into consideration is CAN SLIM. I have been using William O’Neil’s CAN SLIM method for the past two years to invest in the Indian market.

I have explained the CAN SLIM investment strategy in this answer.

Based on CAN SLIM, I follow the below investment matrix to make my investment decisions:

 

To find profitable ideas based on the CAN SLIM method, I suggest investors to take one-month trial of MarketSmith India app. The app is loaded with proprietary rankings and chart patterns that help in filtering stocks based on CAN SLIM parameters.

Happy investing!

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