Stock Dips 101
Don’t kill your portfolio. Buying stocks in a downward trend is a double-edged sword.
If you were ever tempted to “buy the dip”, you need to read this.
"Whenever you find yourself on the side of the majority, it is time to pause and reflect." -Mark Twain
So, ask yourself:
A: Are you buying just because everyone is buying?
B: Or do you genuinely see an opportunity the market is ignoring?
If it's the former, your portfolio is in trouble, and I'm not one to sugarcoat it. If it's the latter, you're heading in the right direction.
When Not to Buy the Dip
Social media can poison your mind. In all aspects, not only investing. You’ll see people preaching new (ineffective) diets for weight loss. Gurus showing their (fake) lavish lifestyle. Love doctors sharing (hurtful) dating tips. And that’s just the start of it.
So, when you’re scrolling and come across people telling you to buy the dip…that’s when you pull the brakes.
It should serve as a clear indicator that the hype has reached a point where it's unlikely for you to profit.
Think about it. If 100 men go after one woman, she will be perceived as more attractive. If 100 investors go after one stock, it will be perceived as more valuable.
But is that the case? Nope. It’s a behavioral theory of social proof that impacts our perception.
We tend to like things just because other people like it.
So, do yourself a favor, don’t buy stupid stocks.
Now that you're in the know about this problem, let me clue you in on when it might make sense to take advantage of the market downturn.
When to Buy the Dip
Let’s say you read the morning paper (a bit old-school, I know) and read about a scandal. Back in 2013, the jewelry powerhouse Tiffany & Co. took Costco to court. They claimed that Costco's in-store signs were calling their rings "Tiffany," and this was confusing customers, making them think they were getting the real deal when it was actually something else.
Some investors were afraid of the size of the lawsuit. Others thought this would hurt the company as a whole. This overreaction by the Market drove Costco's stock price down.
What ultimately happened? Costco paid a few million and that was the end of it. There was no material change to Costco's fundamental business. An investment of $10,000 in Costco around that time would be worth $70,037 today. A CAGR of 19.85%.
This is a perfect example of a minor dip where it would make sense to take advantage. However, some dips are huge.
And that’s when you really need to be smart.
CONCLUSION: What Smart Investors Do
Information + wit = money. Here is my two-step system for analyzing dips.
Firstly, you gather as much information as possible. From CREDIBLE sources!
Secondly, you estimate the long-term impact of that. With YOUR brain!
If the reason behind the dip is something that's going to affect the company for a while, it's usually a good idea to steer clear of that stock. However, if it's a short-term hiccup, that's often where you can find some substantial profit potential.
Before you leave, I have one more quote for you.
"If everybody's doing it, it's probably a bad idea." - Warren Buffett
To get my best work, feel free to join the world’s most powerful stock market newsletter for wealth, stability, and happiness.