Why a fall in share prices is almost invariably a good thing

When I buy a stock at a certain price, I do so because my research has convinced me that at that price, the portion of the company which the share represents is a good buy. In other words, when I spend Rs.50 for buying a share of ABC Ltd., I do so because my perusal of the financial records of the company has convinced me that I am getting (say) Rs.75 worth of 'things' when I buy that share. In the simplest (and most unlikely!)case, the company would have that much cash to show for each share, after paying off all its debtors. For ABC Ltd, that would be the case if, for example, it had 1 Lakh shares outstanding, and as per its Balance Sheet for the latest year,

• Its Net Current Assets is positive,
• Its Fixed Assets are positive(!), and
• Share Holder's Funds minus Loan Funds = Rs. 75 Lakh.

This would mean that by giving Rs.50 for a share of ABC Ltd, I am getting the rights to Rs.75 from the cash reserves of the company. Which certainly seems to be a good bargain. Now suppose that after I bought the stock, its market price went down, say, by 10%. Is that good or bad for me? Assuming that nothing has happened that would have a significant detrimental effect on the company's current value or its long-term future prospects, I would say the fall in price is a good thing for me. Reason : if the share was a good buy at Rs.50, it should be a better buy at Rs.45. It is of no consequence that the market thinks badly of the share, as long as its judgement is not based on what has happened to the company. So, if the price of a stock which I have bought after due diligence falls due to the market's whims alone, it is a good thing for me. I should be happy, and get ready to buy more of the company at the reduced, and therefore more attractive, price. The catch here is, of course, that I don't have an infinite amount of money at my disposal to keep buying the stock at every percentage point fall in its market price. So I adopt the second best approach -- keep buying equal-rupee-valued lots of the share after every n% fall in its price, compared to the average price at which I hold it. The larger the resources I have to buy the lots, the lesser the value of n. At my current state of finances, I would put n to be from 10 to 20, depending on the historical price swings of the share -- the more the swings, the greater the value of n, but never more than 20.