Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.
Some very intelligent individuals may still argue that the markets are rational, but each and every day we can easily find a number of stock moves that can be chalked up to irrational thinking. Sometimes those moves are due to irrational behaviors in the past, making the current day's price change a simple correction. But other times the irrational behavior is happening in real time, as a stock will move dramatically lower or higher because of some insignificant event. The severity of these irrational moments can vary wildly, and they can last from mere hours to several months.
But noticing them and learning from them can help you become a better investor for a number of different reasons. First and foremost is that when you accept that these things happen, you can be prepared when they happen to stocks you own. If you don't fall prey to the irrational behavior yourself, you can instead take advantage of it by purchasing more shares when the market has undervalued them. These "buying opportunities" are a wonderful way to maximize your investment returns and over time will help your portfolio grow to its full potential.
Let's look at a few stocks that displayed some irrational behavior lately.
The gains last Friday and this Monday for shares of Chinese Internet retailer E-Commerce China Dangdang (NYSE:DANG) total more than 16%. That jump followed a 25% tailspin over a three-week period following the company's warning that revenue would come in lower than previously expected. Then today, the stock saw a 2.78% decline. All of these moves seem rather overblown and, indeed, irrational as investors rush in and out of the stock -- especially considering the company is scheduled to release its earnings report on Nov. 14. The 16% uptick probably reflected investor sentiment that the stock had fallen too far and the market had mispriced the shares, but to jump back in to the stock just days before the earnings report is completely irresponsible. It's hard to understand why these investors wouldn't think it better to hold off for a few more days and see the actual results, especially considering the volatility this company has displayed.
Then there's DryShips (NASDAQ:DRYS), which rose 5.2% on Monday ahead of its earnings report that followed the closing bell. While this is certainly a volatile stock and sees price movements of this magnitude on a fairly regular basis, piling into a stock the day it reports earnings is, once again, rather irrational. Sure, that's easy to say now, considering the company reported an earnings-per-share loss greater than what analysts expected -- with the stock falling 2.22% today as a result. But as with Dangdang, why would you buy a stock before you know what's going on with the company -- especially when you have to wait just a few hours?
Investors would do well to remember that the stock market will be open for business tomorrow, and the next day, and the day after that. Why rush into a buy or sell decision when you have plenty of time to properly research a company and figure out what's really going on? Anything else is just gambling, not investing. If that's what you'd rather be doing with your money, then Vegas may be a better place to spend your money than Wall Street.