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We've all seen the headlines warning of market crashes make us want to duck and cover. Then, sometimes the next day, headlines touting record-breaking increases can make us feel bullish beyond reason. Depending on the day or even the hour, the market can be up 100 points one moment and down 100 the next, driving us to the brink of insanity as our emotions range from elation to outright panic. With the volatility in the market, you may wonder whether there's a secret to protecting yourself -- and whether you can make more money from it.
Obsessing over the market will give you an ulcer
One thing is certain: The market is going to fluctuate, and the prices of your stocks will ebb and flow as well. It's inevitable. The flux in the market may be rational or not, but the key to avoiding the stomach pain that comes from this constant change is to invest in a company's future based on solid research. Make financial statements your friend, and check your emotions at the door.
Consider the example of the recent LinkedIn (NYSE: LNKD ) IPO. When LinkedIn went public in May, prices shot up to more than $120 per share. Since then, investors have started to come to their senses, realizing that LinkedIn is overvalued, and shares dropped as low as $60 before rebounding slightly.
Another example is Renren (NYSE: RENN ) . When it went public in May, investors clamored for a piece of the action and paid up to $24 per share. Since then, Renren has fallen to less than $7 per share as investors realize they're not even getting a direct interest in a real operating company.
On the other side are companies that the market is punishing unfairly. Cisco Systems (Nasdaq: CSCO ) is currently trading around $15 per share with a P/E ratio of less than 12, well below its industry's average multiple. Cisco also has more than $26 billion in net cash.
Similarly, Microsoft's (Nasdaq: MSFT ) price is around $24 per share with a P/E ratio of less than 10. And with more than $30 billion in net cash, Microsoft should be more appealing than the market is giving it credit for.
Keep it in perspective
Regardless of the stock change, what each Fool should be asking is, "Do I believe in the future of this company based on my research?" If the answer is no, don't buy it. If you've already bought it, sell.
If the answer is yes, ignore the hype and panic, and remind yourself that you invested in this company based on its possible future, not the current market fluctuations. Besides, if you really believe in the company, the downturn in its stock is the perfect opportunity to load up on shares at a discounted rate.
Put down the antacids
Yes, companies go belly-up, and even the most exhaustive research can't guarantee that a company will do well in the future. However, if you avoid selling during a panic, or buying during a craze, you're almost guaranteed a better financial outcome in the end.
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