How should I respond to bad news about my stocks?

Warning: At some point in your investing life, a financial commentator will slam a stock that you own in your portfolio.

They’ll likely deliver it using colorful language – it’s “overvalued,” “a sucker’s bet,” or even “doomed to fall” – and it might make you question what you ever saw in the stock.

They’ll point to red flags like the company’s lack of competitive advantage, the increasing commoditization of its products, or its poor management strategies. And of course, they’ll roll out convincing numbers and statistics to support their argument. How should you respond to bad news about your stocks?

Take everything you hear and read with a grain of salt.

Remember that commentators are required to have strong opinions – they don’t get tons of readers or invitations to the financial talk shows without them. Also remember that they only tout their past predictions when they happen to get it right … and that might be their only correct call all year.

The power of market commentary

Most people know better than to trust everything they read on the Internet, but they sometimes forget this rule when it comes to market commentaries. That’s especially true when they come from big-name companies and famous business personalities, and when they come across as particularly authoritative.

But here’s the thing…

Anyone with a keyboard and a website can say anything he or she wants, but that doesn’t make it true.

And just because someone is wearing a nice suit and has a fancy title doesn’t mean he has the correct answer. It’s simply his opinion … only louder.

As one member of our stock-picking game, CAPS, points out in a commentary on commentaries, stock market commentators tend to:

  • make short-term forecasts,
  • focus too much on earnings and too little on revenues, and
  • imply connections where they don’t actually exist.

Then there’s the darker side, when analysis is coupled with intent.

Market commentary and the profit motive

Particularly when money is involved, personal motives can get in the way of the truth. As long as greed exists, conflicts of interest are something to beware of in the world of investing.

Maybe commentators are sensationalizing the report in order to draw media attention to their company and increase funding. Maybe they have a personal vendetta against a certain company and are spreading false rumors. Or maybe everything is unbiased, clear-eyed, and entirely honest…

You won’t know unless you do some digging.

And then there are short-sellers.

Short-sellers are betting on the value of a stock to decline. They borrow shares from a broker, sell them, and then buy them back — hopefully at a lower price so that they can pocket the difference.

It’s a perfectly reasonable investing strategy, but the less scrupulous can attempt to scare people away from a stock – they’ve been known to spread rumors and tell lies to drive down a target stock’s value, a strategy known as “short and distort.”

You shouldn’t automatically discount what a short-seller has to say – some of our best friends short stocks from time to time – but you need to be aware of this potential conflict of interest and remember to follow up on all you read and hear.

The Foolish bottom line

If you read a market report that predicts that a stock is bound to fall, don’t panic and toss your shares out the window.

You might be surprised to find that “overvalued” stocks often sustain the highest rates of growth over a long period. Especially after a company has already enjoyed healthy growth, many stock analysts underestimate the potential of a company to disrupt its industry, displace competitors, and continue to grow quickly.

If you’re one of our paying members and have a concern about a recommended stock, check out your service’s site to see what the team has to say.

As always, before you take action, make sure to think things through for yourself. Do some research, draw your own conclusions, and then you make the call on whether or not to keep your shares.

— Answer provided by Motley Fool intern Caroline Jennings

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