"Never try to catch a falling knife” (or “Don’t catch a falling knife") means that when a stock is in free-fall, let it continue to go down and reach bottom. Trying to—often inaccurately—guess the bottom price of the stock is often like trying to catch a falling knife. (It’s bloody.) The expression is an old one but appears to have been applied to Wall Street in the mid-1980s.
Another, similar expression is: “Never catch a falling safe.” This expression also seems to have been applied to the stock market in the mid-1980s. Both expressions are used today, but the “fallling knife” expression is more popular than the “falling safe.”
A slang phrase for a security or industry in which the current price or value has dropped significantly in a short period of time. A falling knife security can rebound, or it can lose all of its value, such as in the case of company bankruptcy where equity shares become worthless.
A falling knife situation can occur because of actual business results (such as a big drop in net earnings) or because of increasingly negative investor sentiment.
As the phrase suggests, buying into a market with a lot of downward momentum can be quite dangerous. If timed perfectly, a buy at the bottom of a long downtrend can be rewarding - both financially and emotionally - but the risks run extremely high. This term implies that the investment will never be a good one again. Examples of stocks that have plummeted are plentiful; a widely-held stock can drop precipitously as the equity ownership is reduced to nothing.
Wikipedia: Stock market bottom
A stock market bottom is a trend reversal that marks the end of a market downturn and the beginning of an upward moving trend. A “bottom” may occur because of the presence of a cycle, or because of panic selling as a reaction to an adverse financial development.
It is easy to identify a bottom in hindsight but very difficult to identify a bottom (referred to by investors as “bottom picking") while it is occurring. This is because the upturn following a decline is often shortlived and results in a continued price decline and hence a loss of capital for the investor who purchased stock(s) during a misperceived or “fake” market bottom.
Risks of attempting to invest at a market bottom
It is very difficult to identify the exact day(s) during which a market bottom is reached. Investing at the time of a perceived bottom can be quite risky, and is often compared to catching a falling knife. In this kind of a situation many investment advisors recommend that an investor proceed with extreme caution and:
. Carefully assess the current and future outlook of the market.
. Invest only when the market and its component stocks are grossly undervalued.
. Make an investment/purchase in three sections, instead of one single purchase.
Examples of investors who incorrectly guessed a market bottom during the period of Oct. 30, 1929-Oct 31, 1931 (see Wall Street Crash of 1929) are given at  Note that the average P/E (price to earnings) ratio of S&P Composite stocks was 32.6 in September 1929 clearly above historical norms.
When the recovery is only a short one, it is termed a dead cat bounce.
7 January 1985, Sacramento (CA) Bee, “An Upturn Seen for Collectibles,” pg. C7:
“I would say that to buy now would be like trying to catch a falling safe at a good time.”
18 June 1985, Dallas (TX) Morning News, “Investor Treats Falling Safes With Caution” by Scott Burns:
... co-authored with William Bowen, another Fort Worth money manager, and more about when to catch a falling safe, which is the essence of “value investing.”
15 October 1987, Washington (DC) Post, “Dow Plummets a Record 95.46 Point” by Stan Hinden, pg. F1:
“They say never try to catch a falling knife. This market looks like a falling knife to me.”
NOW HEAR THIS
By STAFF Leslie Brody, Alan Farnham, David Kirkpatrick, Christopher Knowlton, Patricia Sellers
October 26, 1987
(FORTUNE Magazine) – JEFF PANTAGES, 33, mutual fund manager at Prudential Insurance: ‘’There’s still value in bonds, but buying them now is like trying to catch a falling knife; you’re apt to get bloody.’’
New York (NY) Times
ON LANGUAGE; Bubbling Up
By WILLIAM SAFIRE
Published: September 8, 2002
Markets like macabre metaphors. When stocks begin to rebound, voices of caution suggest it may be only a dead-cat bounce, a phrase coined in The Financial Times in 1985 by reporters in Singapore and Kuala Lumpur to signify a slight rise after a great fall. An equally gruesome figure of speech to characterize the market turmoil of the panicky summer of ‘02 is catch a falling knife.
As the markets were plummeting in midsummer and analysts were feeling around for the bottom, Thomas Galvin of Credit Suisse First Boston told The Washington Post that ‘’investors are unwilling to catch the falling knife.’’ The year before, in April 2001, Todd Petzel of Commonfund Asset Management wrote in his company’s newsletter of a dangerous game by that name that he had been drawn into as a teenager. ‘’It looked a little stupid,’’ he recalled. ‘’Why not wait until the knife hits the ground and then pick it up? But I still tried it once or twice.’’ He then applied it to ‘’beaten-up stocks,’’ as he termed them. ‘’Issues that are falling like a knife dropped from a 12-foot stepladder,’’ he wrote, ‘’are all around us. Wow . . . now is the time to buy. Catch the knife.’’ His point was not to make big bets on tumbling stocks.
Ed Finn, editor and publisher of Barron’s, informs me that ‘’like catching a falling knife, investing in falling stock is often a matter of timing. You want to be sure to grab the handle, not the blade. Making such calls is a hazardous game, because sometimes sharply falling stocks keep falling, leaving the author and like-minded bargain-hunters with bloody hands—er, painful losses.’’ Finn says his wife thinks the phrase comes from the lyric ‘’Catch a falling star and put it in your pocket, save it for a rainy day.’’ Cautious etymologists would say the coinage ‘’may have been influenced by’’ the song. Digging deeper, I found the phrase ‘’snatching at the falling knife’’ in an 1876 poem, ‘’The Queen of the Fairies,’’ by Violet Fane, suggesting that interrupting a tirade was a mistake.
Buy the Rumor, Sell the Fact:
85 Maxims of Wall Street and What They Really Mean
By Michael Maiello
Published by McGraw-Hill Professional
Never Try to Catch a Falling Knife
Your Next Great Stock:
How to Screen the Market for Tomorrow’s Top Performers
By Jack Hough
Hoboken, NJ: John Wiley and Sons
Zweig has always emphasized avoiding losses as much as capturing gains, and not fighting the direction of the market. “If you by aggressively into a bear market or into individual stocks it is akin to trying to catch a falling safe,” he wrote in his 1986 book Winning on Wall Street.
Diversify: Excellent Strategy, Bad Tactic
By Bill Green, Numismatic News
October 23, 2008
Euphoric gold cheer leaders like Fuijenz and those who take his advice stand a very good chance of finding themselves trying to “catch a falling safe.”
New York City • Banking/Finance/Insurance • (0) Comments • Sunday, October 26, 2008 • Permalink