Do we buy stocks on the stock market only because they fall?

Yesterday a friend told me: "The Ibex-35 has risen 13% this year, but there are several companies that have fallen 30%. I'm going to buy them, it's their turn now." Will my friend be right? Probably not.

Just because a stock lags behind the main index does not mean it is the next one to rise. On the contrary, it rather shows weakness. When a company has a bearish trend, we will not buy it until it gives a reversal signal. In technical analysis, this would be equivalent to patterns such as the breakout of a bearish trendline, a flag, or an inverted head-and-shoulders, with its corresponding confirmation.

Then someone will tell me: "But if I had bought it at 30 euros and not at 40 euros, when it was confirmed, I would have gained 30% more." And that is true, but without a reversal pattern, the bearish trend would surely have continued or you would have been stuck, with its implicit opportunity cost. The problem is not just losing money: it is having your capital immobilized until it recovers, if it ever does, while other assets continue to rise. You only need to look at companies like Nike or Hermès this year.

And, therefore, how should we do it? In practice, in the stock market, we must buy strength. Just because a stock has fallen 50% does not mean it will recover, nor does the fact that one has risen 20% mean it will now fall. We must always look for confirmed reversals in bearish trends or rising lows in bullish trends. At the end of the day, we optimize the probabilities. Nobody knows what a stock will do tomorrow, but we tilt the risk in our favor.

What is clear is that in the stock market, everything that goes up eventually comes down. But not everything that goes down ends up going up. Keep in mind that buying cheap is not always buying well.