"The price has dropped -- should I buy?"
That's the question ringing in your ears if you've been thinking about buying shares of Intel
You're also asking yourself that question if you've taken a long, hard look at eBay
Sure, as an investor you know the market is a volatile place. But in the face of recent stock drops, you're undoubtedly worried that the prices of these once-great companies will continue to fall.
Too much projecting
Don't worry, you're not just a worrywart -- you're suffering from a little-known investing disease called "extrapolation fallacy." This occurs when events in the recent past are extrapolated indefinitely into the future. In other words, if Intel's stock price has fallen, it will always fall. Not so. I hope you can see how silly the extrapolation fallacy really is.
You're not alone in your silliness. Extrapolation fallacy is a common ailment in the market. On a broad basis, it contributes to prolonged bear markets. But it can also work in reverse. It can cause people to assume that "things are great, and they'll always be great," which leads to financial bubbles -- like the dot-com craze of the late 1990s. You know, the one Alan Greenspan dubbed "irrational exuberance."
Good results in the long term
The truth is that stock prices rise and fall, but in general they do more rising than falling. Just take a look at the long-term charts of companies such as Apple Computer
Tech companies aren't alone in their ups and downs. The long-term chart of Citigroup, for instance, shows increases of several hundred percent -- and declines of more than 50% -- throughout the years. Overall, however, Citigroup has increased more than 6,500% since the early 1980s.
It's said that history never repeats itself, but it sure does come close. Down trends like the one we're seeing today do not necessarily herald the end of a company. Similarly, up trends will not continue unabated. Whether the company you are interested in is a $200 billion giant like Microsoft
In Motley Fool Stock Advisor, Fool co-founders David and Tom Gardner identify two promising stocks each and every month for members. Even though the share prices move up and down over the short term, the Gardners are confident that they've found long-term outperformers -- stocks whose performance will resemble the Microsofts, Siriuses, and Shuffle Masters of the investing world.
In the service's four years, the brothers have bested the market by nearly 40 percentage points. David and Tom's newest picks were released just last week with the Stock Advisor in-depth review of more than 40 companies on the scorecard. Click here to join the service free for 30 days, learn about the two newest picks, and access the extensive online research tools and dedicated discussion boards.
Fool contributor Jim Mueller owns shares in Intel and Shuffle Master, and his wife owns some Microsoft. Intel and Microsoft are Inside Value picks. Shuffle Master and eBay are Stock Advisor picks. The Motley Fool has a strict disclosure policy.