Doc's Diamonds

I just love the knee jerk reactions in the market !!

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Overall, if the market is acting well, it is best to follow the flow of the market (buy stocks or sectors that are in favor) and make money. When high volitility and fear is a predominant factor in market moves, as it is now, you need to watch for opportunities when market inefficiencies or overreactions occur. That way, you can take advantage of those same overreactions on the way up. The only problem with this concept is that, if it were that easy, everyone would do it and we all would make money. Unfortunately, that can't happen because whenever there is a trade someone sells and another entity buys. Both sides of each trade can ultimately make money depending on what the investor does after they make the trade. For example, the one who buys the stock can hold it until it goes higher and sell. The one who sells the stock can use the money gained for another asset purchase and sell that asset for a gain after it appreciates. In this case, both sides of the trade made money after the trade. Conversely, both sides can lose money after the trade. Therefore, it is really how you invest your capital at any point in time and when you sell it that determines the outcome.

My example for today is RIMM. Many players in this game have invested in RIMM for their portfolios and many have made money. I am one of those who has made some money on that particular investment (about 28% since inception). Now, when the market is going up most of the time, it is hard to miss with a high profile and momentum stock like RIMM. You pick a time and invest in it and, if you stay disciplined, you sell it for a gain. As I wrote many moons ago when things seemed to be up every day, stocks do not go up straight line without some rough spots along the way. Therefore, when RIMM hit my short and long term price targets, I sold a large portion of my position. Lately, when it has hit some rough times, I am rebuilding that position. However, market overreactions make the opportunity much greater at certain points in time. Right now is one of those times.

Apparently analysts have decided that this will not be a RIMM christmas. There have been two downgrades by analysts on consecutive trading days. Now, of course, those analysts have had solid reasoning for their opinions but the market reaction has been almost comical. If you had purchased RIMM just two trading days ago, you might have purchased it for about $123 per share. One downgrade caused their price target on RIMM to go from $138 to $134. The downgrade today was simply going from a buy to a hold. Now, if you had purchased a quality stock at $123 it is worth $104 and change. That means you are down a nifty 15.5% in two trading days. Not a great thing. I would contend that our buyer at $123 was not making a dumb purchase but was caught by market fear and downgrades the invester could not have predicted. However, if you are rebuilding a position as I am or starting a new position, you are certainly farther ahead now than you would have been two days ago. No matter which way RIMM goes, if you buy tomorrow, you are better off than the poor soul who bought two days ago.

Therefore, that is exactly what I will do. Purchase some at the market and some at a considerably lower price if it drops further. In my view, RIMM is just as good a stock now as it was 2 days ago, just 15% cheaper.

I hate market overreactions when they go against me (eg. JCP and KSS), but simply love them when they go my way!

And, BTW, remember that if a stock is purchased at a "discount" and goes back to where it was before the discount, your percentage gain is higher than the percentage of loss for the original investor at $123. In this case, if RIMM goes back to $123 and I purchase it at $104, my gain is 18.3% and not 15%.