A company may hit a rough patch and for a while may make losses consistently for a little while. As a result their stocks will plummet. If you believe this company will bounce back up in future, would you buy their stocks [while still undervalued] so you can make a killing when stock prices go up? Would this be a good investment strategy?
If you have the risk appetite and the right time horizon then that's exactly the approach. Obviously, you have to be able to asses "undervalued" and work out whether you are still comfortable with the fundamentals. But sometimes stocks become cheap and stay cheap. Essentially, they are cheap for a reason so you really need to do your due diligence.
Friends of mine who have invested in stocks usually do that. They buy stocks when they become so cheap. Some were able to sell their stocks at high prices when the companies have recovered but a relative of mine was one of those who were unlucky when it comes to buying while it's cheap. I wouldn't say that he is at the losing end, if there are still chances that the company would recover. For a period of time now, he couldn't sell his stocks because they still remain at a low price.
I'd say set aside 5-10% of your portfolio for speculation. The rest should be put into solid investments. But I believe you should generally use a good chunk of your money to buy good, solid companies when they are cheap. It just takes time finding them. You can find many companies that are not so good that are cheap on paper for good reasons - classic "value trap". You've got to be careful to discern whether it's a good company that is a bargain or a not so good company that will likely stay "cheap" because it's declining fundamentally.
For an amateur in the stocks, I would settle for the so called blue chips which market value is stable. We were burned once with the pager company that we thought would hit it big. Although the stocks we bought amounted to only $150, that was in 1994, we had developed fear in investing in stocks. Who would imagine that the cell phone would be coming in the market in 5 years time? That value did not just plummet but crashed to a few cents. That was really devastating for us.
Speculation is always going to be risky but I think as long as your confident in the research you've done, and your not overly confident then it can pay off. When it does then aswell as the money you'll get back, you also get a little more satisfaction knowing you made a call that a lot of others didn't.
That varies from person to person. If you know the respective company has had a rather white background and think that they will get back on their foot without too much hassle, then sure. But keep in mind the following quote: "If something doesn't go right, go left". I hope you catch my drift! Cheers!
