InvestorQ : What are the typical triggers for falling knifes?
ishika Banerjee made post

What are the typical triggers for falling knifes?

3 years ago

At times the trigger is more macro than micro and this trigger could be a global phenomenon. We saw this phenomenon in 2008 after the sub-prime crisis. In this case, most stocks became falling knives as financial bankruptcies forced sell-offs across markets. Such markets are best avoided, irrespective of apparent value.

Secondly, there are industry level triggers. These triggers impact the entire industry as a whole and you need to be wary of falling knives. These cases are visible in good and bad markets. Tech stocks in 2000 and Real Estate stocks in 2008 were pronounced falling knives. Metal companies became falling knives when the global commodity cycle turned downwards.

Finally, there are triggers for falling knives that are very company specific. There is some unique deficiency in the company which prevents the company from creating value and makes it fall vertically. These have nothing to do with macros or sectors. Satyam in 2009, Kingfisher in 2011 and Financial Technologies in 2013 are extremely stock specific cases. They became falling knives purely due to their internal company-specific problems. That had little to do with the industry or the macro economy as a whole. Don’t ever try to catch a falling knife unless and until you have a perfect handle over the risk involved. That perhaps sums up your strategy for these kinds of markets.