One of the clichés of the market is to buy during dips or corrections. This advice is handed out freely and widely because it makes eminent sense. After all, if we buy at a cheaper price, it is better, right? As, in the long run, cost of acquisition makes a good difference to the ultimate return.
But the fact is, very, very few people can really buy the dips!
Why is that? It is founded on a simple basis that when we make the plan to buy the dips (or receive advice to do so), it is presumed that everything else will stay the same, except the prices- which shall be down, say 20-30%. But it never ever works this way. If prices are down 30%, then there are many other changes happening alongside.
Take for example, the rise in IT stocks in 2021. They surged, especially the mid cap names. Everyone was happy to buy into them, believing that technology is the way of tomorrow. Undoubtedly, it is. If at the time, you were wanting to buy some IT stock that was trading, say, at 4000 and either you were advised or you decided yourself that you would buy it on a decline. You look at the chart or do some valuation math and arrive at a figure of 3000 as being the good price to buy it
Realize that you are making this decision to buy at 3000 based on the situation as it existed on that particular day. Let’s say this was around Sep-Oct 2021. Things were hunky dory for most stocks back then. Cut to June2022. Prices are now down to 3000 (or maybe even lower). The price level has been reached. But is the environment the same? Very clearly not. Back then the NASDAQ and the S&P were pushing upward strongly. So it seemed like the bull market in the IT stocks would continue further. But in Jun22, the NASDAQ has been hammered, so has the S&P, our own market has undergone a small cut of around 15% but IT stocks have been slammed by 30% or more.
Now there are a couple of things to take care of. First is to decide based on the price. Your thought-of level is here. Next to decide on is whether the reaction is completed. Third, to take a look at whether the bullishness in IT is set to continue. Fourth, may be to check the latest quarterly results to see if there are any changes in the scenario. The IT index is not looking anywhere as strong now as it was back then. So suddenly now there is a question mark in your mind- should I buy or not? Next, IT results so far have not been Street beating. Also, there is continued pressure on Techs tocks at the NASDAQ.
Then your mind wanders to the overall scenario of the market. It has been about 8-9 months now on the slide. Is that enough for a reaction? No one seems quite sure.
And then you look at the US situation. Seems like more rate hikes are coming in the next Fed meet. And the war in Ukraine is still dragging. And you are not quite sure whether the rise in Crude is done. Or if Europe will stave off a looming crisis- which the parity of the Euro is seeming to indicate.
By now I guess you have got the point. The situation when you decided that you would buy on a dip can be (and often is) far different from when the prices dip into your target zone.
Completely new set of variables have to be dealt with when looking to buy at a price later. Back in Oct21, what seemed like a value area (i.e. 1000 lower in price) suddenly doesn’t quite seem that way in Jun22. Most people either don’t know how to compute the new value or simply cannot bring up the nerve to go against the current trends. In all probability, it is a combination of both the factors! Result? You delay the action, seeking some confirmations of various kinds.
Real result? The levels come, and if the trend is still intact, the price action resumes. And very soon, the prices rally to 3500 or even better. Looking at the move, you rue your delay in the action and go around telling everyone you know, that you were so sure that it would bounce from 3000 but due to bad luck you couldn’t buy it. Then you try to justify your inaction by pointing to various factors that were around- the US inflation, Nasdaq weakness, Rupee slide, poor results of IT leaders etc. etc. Of course many of those around you will tend to agree with your justification- not because they feel what you did is right but more because they are also doing the exact same thing with their stocks!
One of the problems in trading is that the market gives you endless opportunities not only to win but also to fool yourself endlessly. We have to become conscious of this aspect of trading and catch ourselves when we are doing this. It needs a conscious effort. Otherwise it happens so subliminally that we don’t even realize that we are doing it.
How to get out of this after realizing that we are guilty of this behavior? The only way is the process. Your method or process needs to define where and when you shall take entries and you need to stick with them. That’s the only way you can resist the pressure of news and events when the system asks you to go against the ongoing (short term) trend.
The pressure to give in to current sentiment, follow what others are saying and doing are too strong to resist unless you have the help of a process. Obviously, such a process has to be created and then back tested to prove to oneself that following the process through thick and thin is beneficial. Without faith in your own process, it is difficult to run one.
Summing up, realize that Buy the dip is a cliché that is easy to proffer as advise or adopt as a plan but very difficult to implement. When deciding to do it, also define the parameters that may make you skip the decision to do so (if one can). You are not buying the quantity now because you feel it will be available cheaper. Unless you have defined the process well, it may become difficult to implement.