When you invest, it’s bound to happen that once you put your money into a company, the stock price goes down soon after.
This situation happens to a lot of people. It’s a real common concern about risk and the stock market.
Now, the first thing you’ve got to understand, as a Rule #1 type investor or a Warren Buffett-style investor, is we actually love stocks going down after we buy them.
Why?
For most people, this seems like a big problem.
For this to make sense, you have to understand the difference between price and value.
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In this video, I explain what you should do when the price of a stock you buy goes down. It might not be what you think.
Let’s compare this to buying steaks at the grocery store. If I go to the store and the steaks I normally buy for $10 are on sale today for $5. I get excited. The steak is still worth $10 but I’m only paying $5 for it. What if I go back to the store the next day and the steak is even more on sale for $4? Am I going to be upset that the same steak is MORE on sale? Of course not! I’m going to buy even more.
The same is true with stocks:
When we buy a company, let’s say it’s worth $10 a share, that’s the value of the business. If I’m only paying $5 for it, that’s the price.
If I’m buying a $10 bill and I’m paying $5 for it, the fact that it goes down to $4 tomorrow doesn’t make me sorry I paid $5 for the $10 bill. What makes me excited is that I have an opportunity to buy more of this great business for $4.
That’s great because we are only interested in companies that we know are wonderful and will eventually go back to costing us $10 in a short amount of time. They’re only on sale for a limited time. Understanding the business difference between value and price is crucial to being excited when a stock that you bought goes down further in price.
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Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.