Economy

Investors, avoid these assumptions if you want to understand the market

Think you can ignore your "safe" stocks? California utility PG&E Corp. was considered a "safe" blue-chip stock. Now look at it.David Paul Morris/Bloomberg

Recently, we had a conversation with a client, along the lines of “something must be wrong with XYZ stock, since it keeps going down.”

Certainly, seeing a stock that you own decline is never much fun. But, as in life, it can be dangerous to make assumptions in the stock market. Let’s look at a few common assumptions investors like to make, and take an analytical approach instead.

Don’t assume a stock move is based on fundamentals

Sometimes, events transpire that affect a stock despite having no basis in the fundamentals. For example, an executive might be going through a divorce, so might need to liquidate half of their stock holdings. This doesn’t affect how the company is run, and certainly won’t be press released. Or, maybe a fund manager owns one million shares of a thinly traded stock, and that manager leaves for another job. The new manager comes in, doesn’t like the stock, and decides to sell the million shares. Since it was not his (or her) decision to buy the stock, they are not going to care much at what price they sell it at to clean it out of the just-inherited portfolio. Guess what? That stock is going to be under some pressure. But the company hasn’t changed at all. Sure, sometimes there are ‘leaks’ of company problems, and this can result in some unexplained selling pressure until news is released more widely. It happens. But investors should not just assume a declining stock automatically means a problem stock. On occasion, a declining stock might be a giant buying opportunity.

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