What happened
Although the Dow Jones Industrial Average rose on Monday, the Nasdaq Composite was down sharply once again. The latter includes stocks that soared to incredible heights in 2020, and many of these former highfliers pulled back today, continuing their retreat over the last several sessions.
Among them were international stocks like Bilibili (BILI 0.36%), Baidu (BIDU 1.24%), and Kingsoft Cloud Holdings (KC 1.92%). These stocks have all doubled or more from where they were just one year ago. But each gave some of that back today, plummeting 17%, 11%, and 10% respectively.
Only Bilibili had company-specific news today, filing its annual report with the Securities and Exchange Commission. However, that likely didn't move the stock since it had already provided the financial results to investors about two weeks ago. Therefore, none of these companies reported news that justifies their big drops. But what happened today is nevertheless instructive for investors. Here's why.
Image source: Getty Images.
So what
Stocks represent ownership stakes in real-life businesses; they're not just tickers flashing on your screen. Therefore, when you see a stock make a big move, it's often related to a new development with the underlying business. But when you see related companies making big moves in tandem, it typically points to something else.
Take our three flyers today: Bilibili, Baidu, and Kingsoft Cloud. Not only have all three gone up at roughly the same pace over the past year, they've also fallen at roughly the same pace over the past couple of weeks.
A general drop like this suggests that Wall Street has some overarching concerns. For example, some see escalating political tensions between the U.S. and China as reason to worry about these stocks. Still others are concerned about the Chinese economy. According to the South China Morning Post, Stanley Chan of Emperor Securities said that the government's economic targets are "conservative" and that the modest outlook is making investors question the health of the Chinese economy.
Maybe neither of those issues sounds like a very good reason for stocks like Baidu, Bilibili, and Kingsoft Cloud to pull back as they have. And you're right! But when fear starts to grip investors, molehills like these might as well be Mount Everest.
However, the opposite can also be true at times (like the second half of 2020). When greed is the pervasive feeling on Wall Street, almost anything can be a positive catalyst to send shares higher.
Right now, I believe fear is overpowering greed. And that's the primary reason these three stocks were down today.
Now what
If my hunch is correct, that doesn't mean you should run out and buy any stock that happens to be down. While it's true that Warren Buffett has said to be fearful when others are greedy, and greedy when others are fearful, this isn't a license to buy stocks indiscriminately. Sound investing principles still apply.
Investors should only buy stock in companies that they've researched. When studying stocks, look for companies with a history of success and strong prospects for profit growth. The sell-off that we've seen in recent days with Bilibili, Baidu, and Kingsoft Cloud extend to many more stocks as well. And in my opinion, some compelling buying opportunities are starting to emerge. The key is making sure you're investing for solid reasons and not just emotionally responding to the change in stock price.
