April 19, 2007

Buying on the Dips Can Kill Your Finances

In order to outperform the market, it's a required element that you take a contrarian bent - either through buying into a stock early, shorting one at its apex before an eventual descent, or buying stocks on the cheap, if you feel they have been cut down to size unnecessarily, or by too much, effectively meaning you're betting on a near-term rebound. While I definitely subscribe to a buy and hold strategy for some stocks of reputable companies with serious short and long term upside, I have fallen victim at times by trying too hard to be a contrarian.

Take Yahoo! (NASDAQ: YHOO) for example. Outside of my 401k, I have never been a Yahoo! investor, until yesterday. While I've written previously that I think Yahoo! has lost significant market share and mind share to Google in the search and online ads arena, the company is no slouch. Following Tuesday's quarterly announcements which disappointed analysts, the stock took a significant haircut Wednesday, dropping more than 10 percent. Effectively, the company's stock was on sale for more than 10 percent off. (Unless you start getting picky and looking at current or future P/E)

So, given I had some available cash in eTrade, I added Yahoo! to my portfolio for the first time. If the stock regains half its one-day loss, I'll be up 5%. But, as sometimes happens, the first day's losses continue the next day or even further. Not only did yesterday's pummeling not include a late-day bounce, but Thursday's trading has seen Yahoo! go down an additional 2 1/2%, meaning instead of being up a few hundred bucks, I'm down a few hundred bucks, and I have to root for the stock to rebound just to break even, let alone make money.

This isn't the first time I've lost money on hoping to catch a bounce. It's called "catching a falling knife". If you see a stock taking a dive, and you're trying to accurately pick the bottom, wrong guesses can draw blood, just as much as they can if you, like I once did in 2002, sold Sun Microsystems at 2 1/2 bucks a share. (It now trades at nearly $6)

The question is, will I wait for Yahoo! to rebound, and make money, sell quickly to cut losses, or hold on until I lose even more? Those are the three choices. For now, I'm holding and waiting for an eventual retracing.


  1. Ouch! Between Yahoo and the calcification of your ipod, it's been an expensive week for you.

  2. It really depends on your long term view. It's hard to guess things in the short term, but it's much easier in the long term.

    I think Yahoo will do well in the long term. They still have a huge user base. Their new ad system looks interesting (and the more I play with AdSense the less I like it). So they have some things going for them. If MS and Google go at it, it could let Yahoo make some gains. Of course, I could be completely wrong :)

    I'm going to buy some of their stock and hold for the long term.

  3. Yahoo seems like a good one to just set aside and forget. maybe even average down.

    I once bought 100 shares of ORCL at 8 when it dropped from 18 in Sep 1990. The drop was due to some scandal with accounting practicies but I knew some of their people from church and thought they'd overcome. It then continued to fall to just below 6. The people I knew had quit or been laid off. I was so relieved when I got rid of it for about 18 in Oct 92.
    The only bad thing is looking back later to see what it would have been worth had I kept it. $800 would have grown to near $80000. Or if I'd gotten out at the top of the dotcom bubble it would have been around $180000.
    Ah, the wisdom of hind sight.