DON’T GET CAUGHT UP IN PANIC BUYING AND PANIC SELLING STOCKS
A lot of new investors get interested in the market and want to know how to buy stocks when they hear about popular / high profile companies like Apple, Google, or Facebook in the news. There is no bigger stock today than Apple and it has been soaring. The Facebook IPO will also get A LOT of press when it happens later in the year.
People are very familiar with companies like these because they use them everyday. They are a big part of our lives and when you combine that familiarity with the possibility of making money from them too, a lot of excitement is generated. People don’t want to be left out and they want to be able to say they made money by owning those stocks. But that excitement can sometimes translate into panic, both on the buying and selling sides.
I think we see panic selling a lot more often than panic buying. Fear is a pretty big motivator and often causes people to sell a stock for no reason other than they are scared: scared because of a cautionary news story, scared because of a bad earnings report, or just scared because the stock is dropping and everyone else is scared. We saw that with Netflix late in 2011 when the stock went from around $300 a share to under $100 a share in about three short months. That was a great example of panic selling and it caused the stock to be oversold.
Panic buying is seen much less often but we did see it briefly earlier this week with Apple stock. Take a look at the graph for AAPL that shows an incredible rise of over 100 points just this year. At the end if the chart it is going almost straight up!
It is obvious that no stock can continue that pace for long and for a stock to be going up that fast there has to be an element of panic buying. People wanted in and in now no matter what. They were afraid of being left behind, sitting on the dock while the Apple stock boat sailed away for higher shores.
On 2/25/12 you can see the panic buying at the beginning of the day and then an abrupt shift into panic selling. See graph below:
The last half of the day was almost all selling as apparently some people decided to take their profits and run. But now as I write this on 2/16/12 the stock has recovered and is starting to move back up. What is going on?
Clearly there is a lot of emotion in Apple stock right now which is causing these big ups and downs. There is a lot of demand for the stock by people who fear missing another big run and there are also a lot who are scared to keep holding because it has gone up so fast. Right now it seems that both panic selling and buying are happening at the same time and it is impossible to tell at what price the stock will settle down.
Buying and selling stock when emotion is driving your decisions is hardly ever a good thing. Sometimes it is best to just wait, see what happens, and accept the consequences. Don’t buy or sell a stock just because everyone else is. You should always know why you are buying or selling a stock and have thought out your decision carefully.
I think there will be a tremendous amount of interest in the Facebook offering later in the year which means there will probably be more panic trading. People will be buying with their hearts because they don’t want to miss the next big thing. No one really knows what that company is worth and buying will entail a lot of risk when there is so much pent up enthusiasm and emotion.
