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Knife Catching Is A Dangerous Game

Bob Lang
·2 mins read

As tempting as it may be in the stock market, you should always avoid trying to catch falling knives. Oh, it's always nice to step in and buy some stocks when they go on sale. If you have a long term horizon, those opportunities are ideal, and often lead to huge gains due to massive mispricings.

Back in the Great Financial Crisis of 2008, there were many banks that looked as though they were headed to the graveyard.  Bank of America Corp (NYSE: BAC) and Citigroup (NYSE: C) were among them, the latter was teetering on bankruptcy until the government gave them an injection of liquidity. The former was reeling from a fractured mortgage market and impending recession. BAC was brought down nearly 95% to about $3 a share, a good time to snap it up if you believed the world was not ending. Today the stock is 800% higher than it was at the true bottom.

But as BAC fell from higher levels of mid 40's in 2007 to that crash level just a year later, when was the opportune time to buy in? You really don't know unless you have the benefit of hindsight. Understand, the market will always give you chances to buy (and sell), you have to be patient and wait for your opportunity.

As a trend/momentum trader, you can make money in both directions - up and down.  But trying to catch a bottom is truly a fool's game. You might get lucky and catch that bottom in price, but it's going to be a challenge and often a very uncomfortable feeling. In the recent market crash of March 2020 there were many stocks that hit rock bottom, but if you simply waited a bit longer (maybe out to April or May) you still had a good chance to make profits.  

Some of those names were Penn National  Gaming, Inc. (NASDAQ: PENNNVIDIA Corporation (NASDAQ: NVDA), DraftKings Inc (NASDAQ: DKNG) and Peloton Interactive Inc (NASDAQ: PTON). Some of these names are up 500% or more from the exact low on March 23. All these names were hammered in March, but you could have jumped in later and not taken excessive risk during the stock's fall. Opportunity will always be there, you just don't need to be the first one in. Let the others catch knives, while you just catch trends.

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