What to Do When You Buy a Stock and the Price Goes Down

When you invest, it’s bound to happen that once you put your money into a company, the stock price goes down soon after.

This situation happens to a lot of people. It's a real common concern about risk and the stock market.

This fear often stems from not truly understanding the difference between price and value. Most people react emotionally, but Rule #1 investors know that volatility can create some of the best opportunities to build wealth — if you stay focused on the intrinsic value of the business, not the daily stock ticker.

Why Falling Stock Prices Can Be a Good Thing

Now, the first thing you’ve got to understand, as a Rule #1 type investor or a Warren Buffett-style investor, is we actually love stocks going down after we buy them.

Why?

Think of it this way: temporary price drops are like your favorite store putting your must-have items on clearance. It's only a problem if you don't know what you're buying — but if you do know it's a valuable company, a lower price just means you can own more of it for less.

For most people however, the above scenario seems like a big problem.

For this to make sense, you have to understand the difference between price and value.

In this video, I explain what you should do when the price of a stock you buy goes down. It might not be what you think.

The Steak Sale Analogy: Understanding Price vs. Value

Let’s compare this to buying steaks at the grocery store. If I go to the store and the steaks I normally buy for $10 are on sale today for $5. I get excited. The steak is still worth $10 but I’m only paying $5 for it. What if I go back to the store the next day and the steak is even more on sale for $4? Am I going to be upset that the same steak is MORE on sale? Of course not! I’m going to buy even more.

If you already believed the company was a bargain at $5, seeing it drop to $4 can be an even bigger opportunity — provided you recheck the fundamentals and confirm that the business itself hasn't changed. As Warren Buffett says,

"Price is what you pay, value is what you get."

When we purchase stock in a company, let's say it's worth $10 a share, that's the value of the business. If I'm only paying $5 for it, that's the price.

If I'm buying a $10 bill and I'm paying $5 for it, the fact that it goes down to $4 tomorrow doesn't make me sorry I paid $5 for the $10 bill. What makes me excited is that I have an opportunity to buy more of this great business for $4.

That's great because we are only interested in companies that we know are wonderful and will eventually go back to costing us $10 in a short amount of time. They’re only on sale for a limited time.

Stay Focused on Value, Not Fear

Rule #1 investing teaches us to invest only in businesses with a wide moat (competitive advantage), strong financials, and leadership we trust. When these elements remain intact, a falling stock price simply reflects market emotion — not a deterioration of real value.

Understanding the business difference between value and price is crucial to being excited when a stock that you bought goes down further in price.

📈 Pro Tip: If the price drops even further after your initial buy, consider using the opportunity to lower your cost basis by buying more shares — but only after rechecking the four Ms (Meaning, Moat, Management, and Margin of Safety) to confirm the company is still a great investment.

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**Editor’s Note (Updated April 2025): This article was originally published in 2016 and has been significantly updated in 2025 to reflect current examples and Rule #1 investing insights.