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Falling Knives - Or Opportunities For You To Catch!

Apr. 01, 2018 10:14 PM ET21 Comments
The Dividend Guy profile picture
The Dividend Guy

Imagine you throw a knife in the air to impress people around you and you try to catch it as it rapidly falls. If you succeed, you look like a pro. If you fail, you will catch the blade and cut yourself. Picking a stock rapidly dropping on the market is like catching a falling knife. Some stocks will bounce back and make a great investment, others will continue to drop and bleed your portfolio. Therefore, we call a stock that is brutally dropping a falling knife.

As you can imagine, not all falling knives are great investments. In fact, quite the opposite. There are probably more horror stories than successful trades made on companies that lost the market’s love. However, great returns can be accomplished when you proceed with caution. Here are a few of my tricks to catch a falling knife with my teeth and smile at my public!

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1. Get rid of a common investor bias

Before you start catching any falling stocks on the market, make sure you get rid of this common investor bias: What goes down doesn’t automatically go up. It’s not because General Electric (GE) once traded at $30 that it will bounce back from $13 and get back to what it once was.

Source: Ycharts

The price of a stock is like the love you have for someone. I’m sure you fell deeply in love while a teenager and that high school crush had the most important place in your life. But 10, 20, 30 years later, do you still think about your first love? Do you think such an adrenaline rush will be felt for that person again? Please don’t answer if you’ve been with the same girl since then (I know the feeling, I’m married to my high school crush! Haha!).

This article was written by

The Dividend Guy profile picture
My name is Mike and I’m the author of The Dividend Guy Blog & The Dividend Monk along with the owner and portfolio manager here at Dividend Stocks Rock (DSR). I earned my bachelor degree in finance-marketing, own a CFP title along with an MBA in financial services. Besides being a passionate investor, I’m also happily married with three beautiful children. I started my online venture to educate people about investing and to be able to spend more time with my family. I started my career in the financial industry back in 2003. I earned several promotions along with a good pile of diplomas. I had lots of fun working with clients in private banking for half a decade, but thought I could do more with my life. In 2016, I decided to take a leap of faith and left everything behind to travel across North America and Central America with my family. We drove through nine countries and stayed three months in Costa Rica before returning home. This was an eye-opening adventure that led me in 2017 to quit my job in the financial industry and pursue my dream; helping others with their personal finance through my investing websites. You just found the reason why I quit my suit & tie job!

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