Fire Sale

This is when value investors like warren buffet prefer to jump into the market and buy stocks at a quarter what they were before. However before you decide to throw caution to the wind and buy aimlessly you must remember three things.

1. Fire Sales have been known to get investors stuck in value traps, where they buy a stock that will never recover or even go bankrupt. This can’t be completely avoided but you can try to avoid it by only picking stocks with good future potential and steady cash flow.

2. Just because a stock is undervalued does not mean it will go up in the near future. When stocks are on sale it is normally a good long term opportunity, you must be willing to let the stock run its course. Warren Buffet is a good example of this, he has been known to buy cheap stocks during a bears market and sit on them for the long term, even if they fall 50% or more in the short term.

3. Even companies that are well known and you believe will not fail can still go under. Look at what happened to places like Countrywide and Indymac. Both of these companies were considered to be great long term investments only to be proven wrong during the financial crisis.

That is why many investors will look at the fundamentals of a company and diversify as much as possible in order to avoid losing too much money by bottom picking. Because even though it is a great opportunity, there is always risk that the company you are investing into will not come out of it.

Advantages of Buying During a Fire Sale

There are some good advantages of buying after a bears market, especially if you have a long term approach in mind. During bear markets every company gets hit, even if the company is strong and makes a great investment.

Getting into investments as they are low is what has helped people such as Warren Buffet make vast fortunes over time.

In short this period of time can be the best opportunity to make profit in a longer term perspective, but you have to be careful and still do your research.