By: Stash Graham
When evaluating a stock many retail investors look at many types of charts displaying a company’s share price. Fear generally comes when they see a stock price that has fallen recently. Investors will just look away from investing in the opportunity because they do not want to buy a stock whose chart looks like that.
They believe, if they buy the stock now, a stock price fall could happen again to them because it just happened. They generate negative emotions which sway their decision-making process. While generating this negative bias they are skip studying the company’s underlying fundamentals to see if there is an opportunity. While it may seem counterintuitive, it happens way more often than people are willing to admit.
It is very important to eliminate emotions from the investing process. This importance is only magnified during the period of the current economic cycle. On the flipside, if an investor sees a price chart only going up, they get excited. They don’t want to miss out on the expected run higher; because, due to the recent move in stock price chart movement, they imagine the stock price continuing to move higher.
In summation, I will defer to someone far more qualified than I, Peter Lynch, the legendary former manager of the Magellan Fund, who said that “Charts are great for predicting the past.”