So how do you know when a stock is getting ahead of itself? Sometimes, this is obvious, at least from an analyst’s position. Sometimes, it is made obvious by the way in which a stock is promoted. But most of the time, it’s very hard, and requires carefully weighing risk against potential, a task made difficult, though not impossible, by the fact that neither risk nor potential can be known with any degree of certainty, and, on occasion, they aren’t even quantifiable. So how does one analyze that which cannot be quantified? Well, it can be done and must be done, but to do it, one needs a mind that is comfortable weighing, comparing, and juggling vagaries.
Last week and the week before, the market suffered a three-day flash-correction. It was a painful and frightening punch in the gut, especially for those of us who own lots of tech stocks, and by this time, most of us do, for the same reason John Dillinger robbed banks—because that’s where the money is. Still, the fact that stocks have fallen in price doesn’t necessarily make them good bargains. Today, we’re looking for stock in companies where potentially serious threats have emerged, but the market has not yet responded seriously enough. These aren’t necessarily great stocks to short-sell, but they are stocks to avoid.
Remember to treat these ideas as just that, ideas, and do your own research before making any investment decision.