Investors have different risk tolerances, time horizons and sector preferences. But chances are you have a particular stock or two that you have owned for a while or plan to own it for a while.
But as large swathes of the market have seen double-digit dips in 2022, what should you do when a company you thought was a keeper goes down in the red? Here are the strategies you can use when a top stock, or one you were particularly confident in, sees big losses.
Revisit why you bought the company in the first place
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The stock market has historically been an excellent engine for wealth creation over time. It is a global market with a large pool of buyers and sellers, which makes prices well known and gives stocks an element of liquidity unmatched by real estate such as real estate. However, this liquidity can make it tempting to buy or sell when volatility is on the rise.
When a stock is collapsing, it is vital to remember why you invested in the company in the first place. How Amazon (NASDAQ: AMZN) As the stock fell from its split-adjusted price of $ 188 per share to its peak at a 52-week low just above $ 100, many investors panicked and ran for exits during that short time. Amazon Web Services (AWS) growth is likely to slow after a phenomenal 2020 and 2021, and Amazon was struggling to make a profit on its domestic e-commerce business as labor and fuel costs reduced its profits.
However, a long-term investor in Amazon is unlikely to have bought the stock simply because they hoped the 2022 results would outperform year after year. A more likely investment thesis would revolve around a bet on AWS’s high margin growth as the cloud industry continues to grow and becomes an essential part of the modern enterprise. It could also be a bet on ecommerce and streaming via Prime Video and Twitch.
By revisiting why you bought a stock in the first place, it’s much easier to resist the urge to sell when it falls big on a single earning ad. With Amazon stock topping 10% last Friday in response to a solid second quarter earnings report, it’s easy to say the stock was a hindsight buy. But at the moment, the situation is much less certain and requires a good dose of discipline and patience to overcome any volatility.
Determines if the sell-off is valid
The strong sales and steep rises can seem disconcerting to new investors who may be wondering if a company like Amazon is really worth hundreds of billions of dollars less today than it was a year ago. At times like these, I like to think of a lesson from Morgan Housel’s book, The psychology of Money. The lesson is knowing what game you are playing. The stock market is a playing field on which different games are played by different types of investors. If you are a short-term trader who cares more about a quarterly result than a five-year strategic plan, then a company that lacks guidance is a big deal. However, the most effective strategy is to find companies that are capable of long-term success and let those companies grow wealth over time.
In this sense, the price of a stock may deserve to go down, while the factors behind this sell-off have little or nothing to do with why you own the stock in the first place. For instance, Procter and gambling (NYSE: PG) shares fell as much as 7% on July 29 due to lost earnings and rising costs. However, the company’s cash flows, market position, and product mix make it more than capable of paying and increasing its long-term dividends and stock buybacks. P&G is a classic example of a stock that probably deserved to drop because its quarterly results fell short of expectations. But the drop in its share price may be largely meaningless to shareholders who have chosen the stock as a multi-decade passive income stream or to supplement retirement income.
Think about what might come next and how you would react
Another good strategy to implement if a title you like falls is planning what to do next. If it keeps falling, will you buy more? If not, what would it take to buy more? If the company’s problems persist into the next few quarters, how would this affect the long-term investment thesis? Are the issues that are putting the stock under pressure likely short-term headwinds or symptoms of a bigger problem?
By asking these questions upfront, an investor has a better chance of making a calculated decision when volatility is high, instead of falling victim to impulsive reactions.
Zoom out and focus on what matters most
Bear markets can be intense and stressful for even the most experienced investors. But investing means finding companies that meet your specific goals, whether they are to grow, generate income, offer good value, etc. By revisiting the fundamentals, you can give yourself the preparation and confidence to make the best decision for your wallet and financial health.
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John Mackey, CEO of Whole Foods Market, a subsidiary of Amazon, is a board member of The Motley Fool. Daniel Foelber has no position in any of the titles mentioned. The Motley Fool has locations and recommends Amazon. The Motley Fool has a disclosure policy.