Can we buy a stock after it registers a sharp up-move?
The quote, "Success has a thousand fathers and failure is an orphan." It means many people will seek credit for your success, but few will accept responsibility for your failure. As an investor, you have to take your own responsibility for your failures, and it pinches more in a deep correction. What really matters is the balance of mind and behaviour, particularly during times of exuberance in the markets where stocks tend to run ahead of fundamentals. As a rational investor, what is important is to stay away from greed and take every investment decision cautiously.
How to avoid failure is the most important aspect of investing rather than how to achieve success. Let’s take an important aspect of price momentum investing with our own behaviours.
Most investors buy the stock after it registers a sharp up-move. Even in our forum, we get more questions on its purchase after the stock moves up sharply, but not when it’s at a buy range. The Fear of Missing Out (FOMO), refers to the feeling of anxiety or uneasiness you get when other people are sharing a positive or unique experience while you are missing out, You feel like "I should be on this move; I can’t let this opportunity pass me by." In essence, the desire to join in on the price movement clouds your judgment, making it difficult for you to perform the necessary analysis of the stock before placing a trade. This is where you are trapped. It’s also called a "bulls trap," but there is a solution to it.
The key is to determine what is really driving the share price and your compulsion to buy it. If you are addicted to the price movement, you are bound to make this kind of mistake very often. If your buying decisions are being driven by a lack of emotional quotient rather than earnings growth, the best thing you can do is turn off the screen and dust off your copy of Warren Buffet’s The Snowball. It’s a good book to read and reread when we don’t have emotional discipline. That will probably help you rectify this mistake.