The Risk of Catching a Falling Knife

Not a surprise. My posting yesterday to start nibbling and buy more when the market goes down, was met with intense skepticism by many.  One even suggested my advice is like “catching a falling knife”, referring to a common saying in Wall Street where people could end up going bankrupt as the correction could turn out to be much longer and deeper. In fact, the market promptly going down by 182 points or down 3.05% to 5789 today did not seem to help.

 Well, I take that back. I think it did help. After all, those that took my advice would have bought at a much lower prices than the prices the day before.

Nevertheless, let me offer more perspective on my call:

  1. Again, I did not say out right buy, I did say nibble and buy more when the market goes down. I recognize the market could go lower, for the reasons I stated. To me I would rather be early than late.
  2. Although it is indeed not advisable to “catch a falling knife”, I believe such caution is more serious when you are trading in the foreign exchange market and when you are using significant leverage. When buying a stock, you are buying a share in the future growth and earnings generated by very competent professional managers of the company. There is significant value in your purchase. Furthermore, without leverage, it is not likely for you to lose all your money.
  3. Although there is indeed risk in trying to ” catch a falling knife”, I am willing to take that risk considering that ” it is always darkest before dawn” and the best time to buy is when “there is panic in the streets” .
  4. I really do not see justification for the fear behind the US Fed’s pronouncements, except for the stock prices being over valued a month ago. I think Bernanke is saying the Fed will no longer allow interest rates to be very low ” if the economic conditions continue to improve. ”  There is a big if there. What he is saying is what the Fed is expected to do. There is really no surprise there. It is justified because there is the danger of inflation if interest rates are very low while the economy is expanding.  Perhaps most are skeptical the Fed will not succeed in its balancing act and the correction reflects that bet. I am willing to take the opposite bet.

Of course only time will tell whether it is indeed time to start buying now or not.  However, with the “froth” taken out of the market, I think there is more risk in missing out on a possible move up. I am willing to make the bet that the US Fed, the Philippine government and the professional managers running the companies whose stock I purchase will collectively succeed in their efforts to create significantly higher value to the Philippine stocks that I purchase.

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