When exploring the world of stock trading, it’s common to encounter countless opinions and strategies, especially on platforms like YouTube. From my experience, there’s a significant amount of misinformation and overgeneralization, particularly around the topic of Stop Loss Orders. Many brokers include Stop Loss options as part of their trading toolkit, and numerous videos advocate for their use to limit losses. But this strategy doesn’t align with my approach. Instead of setting a Stop Loss, I believe in buying more shares on price declines when the fundamentals of the investment are still strong.
Start with Fundamental Analysis
No matter the strategy, successful investing begins with a solid foundation in fundamental analysis. Before exchanging hard-earned money for shares of any business, it’s essential to understand the company's financial health. Key indicators like Revenue Growth, Net Income Growth, Cash Flow Growth, and Debt Reduction are, in my view, fairly universal signs of financial strength and are often synonymous with long-term price appreciation. These fundamentals don’t just support stable stock prices; they often signal the potential for stable dividends and stock buybacks by the company, both of which can add value to an investment.
For example, if a company has been struggling but is now showing improved revenue and a reduction in debt over successive quarters, these could be signs of a positive turnaround. By analyzing such fundamentals, we can invest with more confidence, even if the company has had a rocky past.
The “Buy More on Price Declines” Approach
My approach to declining prices centers around buying more shares when the fundamentals remain strong. A concept that aligns with this strategy is Fibonacci Retracement. Leonardo Fibonacci, a mathematician from the 12th century, outlined a series of ratios that traders often use to predict market pullbacks and potential support levels. These ratios can help identify favorable price levels for adding to an existing position.
Let’s say we purchase a stock near its 52-week high. At that level, the likelihood of further price increases is lower compared to buying at a discount. If we wait until the stock drops to around 60% of its 52-week high and then buy, our chance for gains is generally greater. And if the stock price continues to decline, reaching 40% of its 52-week high, I see this as an even better opportunity to buy more shares—assuming the fundamental health of the company hasn’t changed. By purchasing at these lower price points, the probability of gains improves because we’re buying closer to a potential support level where the price is more likely to rebound.
Fibonacci Retracements for Ford Motor Company
Price Targeting; Establishing Probability of Short Term Price Gains
_ Odds Price
0 0% 14.85 52 Week High
1 23.6% 13.59
2 38.2% 12.80
3 50% 12.17
4 61.8% 11.54
5 100% 9.49 52 Week Low
Dividends and Buying on Pullbacks
For investors focusing on dividend income, buying more shares on price pullbacks can be especially advantageous. When the fundamentals are strong, purchasing additional shares during market declines means increasing the number of dividend-paying shares in the portfolio, enhancing potential income. When seeking Dividends, despite the price movements, Investors are seeking Income and often Tax Advantages.
For example, if we own shares of a company paying a reliable 4% dividend yield and the stock price drops 20% without any fundamental changes, our effective yield on the new purchase price becomes even more attractive. This is especially valuable if the dividends are qualified dividends, which enjoy a lower tax rate, adding another layer of benefit to reinvesting or taking the dividends as income.
My Thought
The world of investing is complex, and while stop losses may work for some, I find the strategy of buying more shares on price declines more aligned with long-term growth, particularly when backed by solid fundamental analysis. However, it’s critical to take all advice—mine included—with careful consideration. Investing in the stock market requires a thoughtful strategy that aligns with one’s personal financial goals, risk tolerance, and understanding of the companies in which they are investing.
Disclaimer
This blog post is for informational purposes only and reflects my personal opinions and experiences. It is not intended to be investment advice. Stock market investments carry risks, and individuals should carefully assess their financial situation and consult with a financial advisor before making investment decisions. I am not liable for any decisions readers make based on this content.
