Buy when others are fearful... How to know if we're trying to catch a falling knife?

Hi Keane!

This is one of the hardest things to handle as an investor. It also depends on how you approach the financial markets. Are you trying to look at stocks as representing a piece of a business, or are you looking at price-action to tell you when to buy/sell? The latter is known as technical analysis, and that's not something I know much about.

For the former, also known as fundamental analysis, I can share some thoughts. There is always a fear of catching a falling knife, because (1) it is painful, and (2) we don't actually know whether the stock will recover. How I approach this situation is, I invest knowing full well that my stocks will fall, and fall often. But I also invest mainly by selecting companies with really bright long-term prospects. When I invest in such companies, I have confidence that their share prices, in aggregate, will do well over the long run. So I'm not troubled even if their share prices fall, even right after I've bought them. It's important to know that even the best-performing stocks also suffer sickening declines from time-to-time. From 1997 to 2018, the peak-to-trough decline for Amazon in each year ranged from 12.6% to 83.0%, meaning to say that Amazon’s stock price had experienced a double-digit peak-to-trough fall every year. Over the same period, Amazon’s stock price climbed from US$1.96 to US$1,501.97, for an astonishing gain of over 76,000%.

The danger of catching a real falling knife, is when you've invested in companies with really poor long-term business prospects. There are some fundamentals-based investors who excel in such situations. They invest in companies with poor long-term business prospects, but whose share prices are overly pessismistic. So they may be able to avoid falling knives. But I think in general, if you're simply buying companies with lousy business futures, then your chances of catching a falling knife will be high.

Regarding the Hang Seng Index, it's worth noting that most of the companies in the index do business mainly in China, and not Hong Kong. So when trying to determine if the index makes sense for your portfolio, it's worth thinking about the general business landscape in China.

Hi Keane!

The basic investment theory to earn a return in to "buy low, sell high". This can be acheived by investing when others are feearful and prices are falling, so that when the markets gain again, you can be better off.

However, looking at technical indicators may not be too beneficial as not too many people succeed using those. Fundamenal analysis, on the other hand, helps you find good opportunities for investment. As a principle, I invest when the market is down about 10-15%, but I choose only those scrips which I actually believe will do well.
I work at kristal.AI, and it's my passion to evaluate various upcoming investment opportunities.