How do you catch a falling knife without getting hurt? Many investors salivate when they see a stock falling sharply, knowing in their heart of hearts that a rebound will occur. Timing is the tricky part, though. Barry Ritholtz at The Big Picture has a few guidelines to help take out some of the guesswork - a process that worked well for him after BP PLC's sharp decline last year, and subsequent rebound.
He has three ideas: Scale in over time, look at the 40 per cent below enterprise value price and wait until an upside break over the 20-day moving average for a freefalling stock.
"These are all general methods that can be as applied to any name, not just BP," he said. "Any stock can be a winner on a purely random basis; what matters more than any single successful outcome is a repeatable methodology."
Take note, Sino-Forest Corp. investors.