@Tar , @Worldlywiseinvestors , Very interesting discussion. Putting up something I read in The Next Apple book. He has beautifully listed various stages and reasons for buying…
Stocks are just like products – just like there are different buyers in the different stages of a
product cycle, there are different people buying at every stage of a typical growth stock’s price
cycle. There are innovators, early adopters, early majority, late majority and laggards. There are
various market participants with different philosophies and reasons to buy:
A) Some buy early, long before the crowd, because they understand or speculate about
the potential impact a company or an industry will have. Some buy when a company is
still losing money, but it has great potential, a great story behind it.
B) Some buy when a company breaks out to a new 52-week high from a proper base.
This could happen well before a company reports any earnings or an improvement in
growth. There are market participants who don’t care whether the company is making
plush bears or space rockets. As long as its stock price is making new highs, they ride it.
C) Some buy when there’s fear of missing out. Institutions have to put money to work,
and they have to choose assets to allocate to. At any given time, there are only a few great
growth stories in the market and thousands of institutions that want to own them. In this
case, P/E ratios often don’t matter. It is all about catching the next big thing. Trends
persist because supply is limited – early buyers are not eager to sell, and there are plenty
of new buyers that would like to participate. There’s a scarcity of great growth stories,
and Wall Street loves growth.
D) Some buy when the company reports its first profitable quarter.
E) Some buy when a company has had several quarters of high growth and has a group
of analysts that follow it.
F) Some buy when a company reaches a certain size.
G) Some buy because they are forced to cover their early/wrong short position. Every
trend needs doubters and skeptics. Otherwise, there wouldn’t be anyone left to buy. The
existence of large short interest has fueled not or one or two big trends.
H) Some buy when a certain market cap is reached – some large funds cannot participate
in companies with market caps under $5 billion because they cannot accumulate a
position that is big enough to make a difference in their returns. When a company gets
from $1 to 5 billion and it continues to deliver solid growth numbers, it will find a whole
new set of buyers
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