Stocks For Sale
Charles B. Carlson, CFA
Contributing Editor, Dow Theory Forecasts
I went shopping this past weekend. I bought some shoes and clothing. I didn't really need the stuff, but the prices were pretty good. In fact, the prices were discounted so much that I couldn't help myself.
That's the typical market dynamic - prices fall, merchandise moves.
Interestingly, those market forces that drive consumers to buy don't often work in the biggest market of all - the stock market.
Indeed, the stock market is the one market where buyers want to buy more of an item the more expensive it becomes. Conversely, the cheaper the merchandise becomes, the more scarce the buyers.
Why the difference in market behavior? One reason is that your successful purchase in the stock market today depends on what the stock does tomorrow and the next day and the next day. A stock is bought for its appreciation prospects, for its future value.
That's not the way it is when you buy a shirt. You know that the shirt you buy today will be the same shirt offering the same value tomorrow and the next day and the next day. You don't buy a shirt because you think it will become more valuable tomorrow. You buy because of the value it offers you today.
Thus, uncertainty is the reason that investors don't treat the stock market like a clothing store - uncertainty over tomorrow's value for stocks.
So how can investors cope with the uncertainty of buying stocks when they are seemingly on sale?
You can control some of the uncertainty by not limiting your stocks to just one. In other words, you diversify. With a diversified portfolio, you are more apt to step up and buy a stock on sale, knowing your entire investment well-being is not riding on this one stock.
In fact, that's one of the unsung benefits of having a diversified portfolio. A diversified portfolio may embolden you to buy stocks that are beaten up, which could ultimately prove rewarding over time.




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