📉Buying in the dip

Making insights on why buying in the dip in the equity market is menacing.

What is Buying on dips?

Buying on dip simply means buying a stock or asset, like crypto, after its price has declined from a high. To say in a layman's language, it's like actually buying a shirt when there is a discount or sale. Ideally, you are getting a bargain, and if the price rebounds you make money.

Why is it dangerous?

So, the strategy of buying in the dip is so fascinating and might attract a lot of retail investors to jump into the market, but notice that I had highlighted the word 'if' in the above stanza. So it is conditional and you are betting on a probability that the price of the stock might increase in the future. But, what if doesn't?

Buy on Dips simply means that you are averaging down your position on a stock/asset. For example: If you buy ITC at 220, then if it falls to 200, you buy some more. And you keep doing that with every fall.

And at the time of writing this blog, there has been a huge correction in the Indian equity market for the past one week and a huge crash in the Nasdaq for nearly a month. There is n number of reasons for this. It might be due to the Omicron variant or the new one - Neocov where 1/3 die in study research.

So a lot of people started exiting FDs, Debt funds and started buying in the dip. But not every dip is like March 2020 covid dip where the bounce-back was immediate. This time around, if things get worse, it may take a long time to recover. Nobody knows.

If stocks are down 30-40%+, it could be that something has fundamentally changed, even if there is no news about it out there. Markets are super-efficient in the world we live in today, if something seems too good to be true, it usually is.

Well, to explain it more nakedly, assume 2 scenarios in a market dip scenario. Stock A has been on a discount of ~15%, so you decide to buy A at the market-correction moment assuming that stock A would rebound and you take profits. In the same market fall, you decide to buy stock B along with stock A which is also at a fall of ~15% hoping stock B would also bounce back. But what if stock B doesn't and the company is not performing well and if you haven’t made your research, then you are in a soup.

Don't believe me?

Consider Reliance Communication - at one point the stock was trading at INR 845, now it is trading at INR 3.60 Yes Bank and Vodafone are some other illustrations.

Don't try to catch a falling knife.

Then, what's the plan?

It is impossible to guess the price of a stock. If you are catching a falling stock, then there should be some logic behind that.

• Don't end up investing an insane amount of money on a single stock (no matter how strongly you feel about it).

Don't put all your eggs in one basket!

• Don't make the buy-on dips an ego issue. If you are wrong about a stock, cut your losses and move on.

• Anyone can be wrong about a stock/firm. Valuing businesses is highly complex.

• You don't need to 'buy the dip' just to prove that you are right.

• Make your own research about a company.

One wrong move and you might have to take a forced retirement from the market. You can read more about how to pick a stock from one of my previous blogs here.