Monday, October 27, 2008

What goes up, comes down & What comes down, goes up

You throw a rubber ball up in the air. The ball goes upto a certain height and comes down again. You throw the same rubber ball down on the ground. The ball touches the ground and bounces back up again. You can see this pattern in stocks also.

When AAPL was trading at $90 in 2006, many felt that it was overvalued. But, the stock kept going up & up until it reached $200 in late 2007. In Dec 2007, many felt that AAPL can easily go to $250 or $300. People strongly believed that buying at $200 is a bargain. Analysts were throwing crazy numbers. But, what happened in 2008?

After the financial meltdown, most of the stocks lost their value. AAPL came back to $90 again in 2008. AAPL nearly lost 60% of its value. It is hard to believe that AAPL, the dream stock of many hedge funds, is trading at $90. Now in 2008, many are betting that it would go down even further because of the poor economy.

There is no 'perfect' time to buy a stock. Any stock that goes up, will come down again. Any stock that goes down, will come back up again. (Ofcourze, the company has to stick around, till the recovery ! :)). If stocks were uni-directional, then nobody would be trading stocks. Don't make emotional decisions when you buy or sell stocks. Develop a plan and stick to it. Don't be greedy or over-optimistic.

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