Saturday, December 8, 2012

What to Do When a Sell-Off Strikes Your Stock

We've all been there. You check your stocks in the morning, take a sip of coffee, only to find -- spppittt! -- one of your stocks is down big, real big.

At this point many questions begin to race through your mind -- What happened? Did I miss something? Should I sell? Should I buy? It feels like the clock is ticking and that you need to make a decision now.

These are the times that try patient investors' souls*, and they're important ones to manage properly. Knee-jerk reactions are rarely rewarded in the stock market.

So let's explore ways that we might become better at handling these situations. Here are seven steps that I've come up with over the years:

  1. It's important to stay as calm as possible. Breathe and scan. 
  2. Rather than read or watch news reports, which are typically sensationalized, go straight to the source. Read the company's press release and any associated presentation materials.
  3. After you've gathered the facts, develop your own take on the event.
  4. Revisit your original investment thesis, paying close attention to how the new information might impact the company's longer-term competitive position.
  5. Ask yourself, "Does this development fundamentally alter my thesis?" If so, consider selling and don't anchor into the price you originally paid for the stock.
  6. Consider buying more if your thesis remains intact, bearing in mind your current exposure to the investment and how the new share price compares with your fair value estimate. 
  7. Remember that doing nothing is doing something. As such, know why you're deciding not to take an action. 
What do you think? Have one to add to the list? Please post your thoughts in the comments section below.


@toddwenning on Twitter

*Hat-tip to Mr. Paine