I’ve seen so many people on social media talking about the stock market being on sale. This way of looking at the recent declines in the stock market is much better than focusing on losses. Many stocks decline with the rest of the market due to factors such as inflation and recession, leading many people to purchase stocks based on the sale concept. Buying stocks at a low price to sell them at a higher price later is a common investing goal.

 

While it’s great to purchase stocks that have had a major decline in line with an overall market decline, it’s dangerous to assume that the stock will reach a previous high or experience a high level of growth. For example, I was recently asked about Peloton stock from someone who wanted to buy shares at around $7 to $8 USD. This person said that they hoped that it would recover and reach and surpass its previous high of around $160 USD. The company is facing many internal and external issues such as low growth due to the weak economy, that make it unlikely for it to recover to $160 per share or more, at least not anytime soon.

 

Unfortunately, while some stocks recover from market declines this does not mean that a stock will recover to a past high price or recover significantly. Yes, there are many examples of where stock prices have done the opposite, had a large decline only to recover and exceed a previous high. However, this is not always the case. A great example of this is the company General Electric (GE) that traded at $454 USD in 2000 and now trades at around $70 USD.  The stock has never reached its all-time high in the last two decades.

 

Does this mean that you can’t make money on stocks that do not reach or exceed a previous high? No, not at all as you could have purchased Peloton stock at around $24 USD in January 2022 and sold it for around $37 USD a month later.  However, the stock has declined since it reached $37 USD. Moreover, to be able to sell at that price would require an investor to watch the stock very closely. While some investors might not mind tracking stocks daily, others might not.

 

To avoid wasting time on stocks that might not recover to past highs and stocks that overall might not perform well, find companies that have high growth potential. Look for companies that have a long history of growth and that will likely continue to grow because the company is making revolutionary changes to the way people live. Growth stocks typically have experienced growth rates of at least 10% in the past five years for smaller companies and 5% to 7% for larger companies.

 

Remember, a down economy is a great time to purchase stocks, index funds, mutual funds, etc. However, just because there is a decline in the entire market, this does not mean that every stock is a great investment. As always, do your homework on the stocks and funds that you are considering for purchase.