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How investors buy dips
How investors buy dips uses checkups, winners on sale and bargain prices to make money during stock market corrections. Savvy investors buy winners in dips adding more profit makers to their portfolios.
Wealth Building Portfolio Management, Lesson 2, teaches how long term investors add dip management and buying to their portfolio management skills used during dips and corrections. Links at the end guide you to related content if you want to learn more.
What’s in this lesson for me?
How sharp investors buy dips has three money making ways to use market dips or corrections. The steps give you a way to turn a stock market correction into a money making opportunity.
Corrections and dips can equal opportunity
When stock market corrections happen, remember they are part of a normal market. When a correction happens, until investors see reasons to change course, we simply continue to own the good quality dividend paying stocks. Quality dividend paying stocks keep paying us even in a correction or downturn.
Should we be speculating, that can be different! Speculations are very different from investments held for income. Any holdings that do not pay dividends quickly eat capital during a downturn. During such times, sell the culprits and do so quickly!
However, be ready to seize opportunity. Downturns can be excellent buying opportunities for both speculations and investments. Speculations that you know and believe in can be bought back once the downturn runs its course. Be careful, patience gets well rewarded. Buying and selling speculations can be a mugs game with many head fakes and false direction signals. It takes experience to consistently play speculations well. Beginners should seek experienced advice if speculations are of interest.
As for investment quality dividend paying stocks, corrections present the opportunity to buy quality at a discount. You get to buy for less and immediately begin getting paid for doing so! Just wait to see market direction is no longer down. Once the trend turns positive, put your capital to work!
Don’t be in a hurry to buy. The investor with patience gets well paid to wait and buy when great companies are on sale! Just be ready. In a few days or even weeks ahead buy at a favorable price and put that cash to work getting you paid! The market will say when it is time. Until then, just sit on your cash.
Homework pays very well for investors. So always do your homework before you invest. Investigate. Question and think. Even your financial advisor will enjoy dealing with a better informed and thinking client.
Defining the dip and corrections
We can not and do not know what will happen next in stock markets. And we are not alone, nobody and no technology knows. But we can profitably move when a dip happens. We begin by defining a dip or correction.
We define a price drop of 10% as a dip which can apply to a stock or to the market. So when a market index drops 10% that market is in a dip or correction. Should a market index not drop 10%, a stock can still be in a dip and when the market dips any stock may not dip 10%.
We accept the index behavior as indicating what the market is doing. Like all investing topics, this one attracts lots of opinions. However, the loudest voices may not be your best source of information. Loud voices may just be wanting to get you into trading…on their systems…with your money.
Corrections cause commotion
Markets, corrections get the attention of technology, geeks and prolific pundit pontification. Corrections can get noisy because people get excited when markets go down. But consider most of the commotion as bullhorn blather. We can safely ignore it.
Our definition is simple and our response to dips a straightforward step by step process. While buying on dips is a trading strategy, it does not work nearly as well as long term investing. However, investors can use stock market dips to add to their long term gains.
Corrections happen — often!
Corrections are part of normal and regular stock market behavior. The market has peaks and troughs and always will. A correction happens about once a year but it is not a scheduled event. Just accept them as inevitable stock market events.
Corrections are quick
Most times corrections are short lived events in rising markets. So, most corrections are over in a matter of a few weeks to three months. Most often 2 to 15 weeks.
The price drop in corrections are usually quick! Prices fall much faster than they rise in most declining market situations.
Investors manage corrections by staying the course rather than taking any defensive action. Corrections should cause investors no undue concern for up to three months.
Predicting when and why of corrections
Corrections can not be predicted by anyone or any technology. Likewise, the cause or timing of corrections can not be predicted. While they do happen about once a year, they can happen sooner. Some have happened a few months apart, others happened several years apart. No reliable correction indicator has been found to point to the next one. Don’t expect one to be found.
Corrections don’t matter to investors
Long term investors don’t worry about corrections. Short term traders love them because corrections provide great trading opportunities. Those traders and heavily leveraged margin accounts do need to act during corrections.
Investors have the choice of just waiting. Or they can act and pick up some nice gains. This lesson focuses on investors who are ready to act, not on traders or players on margin.
Note: no beginning investor should consider using margin or short term trading. Both using margin or short term trading can be used to make money. But doing it well requires a considerable amount of knowledge and experience. Be careful out there!
We know corrections happen and will happen again, but we do not know when or what will trigger the next correction. What we can do is be prepared for any money making possibility in the next correction.
Corrections as wake up or opportunity calls
Investors use corrections to check that each holding fits as a good long term dividend payer. That means a dip can be a wake up call if you find any holdings that should be weeded out of your portfolio.
Know what you own and why you own each holding. If any investment does not measure up to your expectations or needs, get rid of it. Those holdings that continue to meet your needs are good to keep.
What to do when the stock market dips
Be ready for the dip by being ready to take action when it happens. No panic is allowed or needed! We have things to do when a correction happens. Remember, investors have a long term view, if you do not have a long term view, you are not investing.
Once you complete the portfolio check and make any needed changes, consider buying opportunities. Those opportunities come in three layers.
- First, investors check for buying opportunities to add more to their current holdings.
- Second, they look to see is any pending targets present buying opportunities.
- Third, investors see if the market is offering any other discounted stock bargains.
When investors profit behaving like traders
Buying more on the dip can be a money making strategy that bulks up positions on stocks that you own. Most consider dip buying trading rather than investing. But this is a case of using part of a trader strategy to add to investing gains. You can fatten returns on stocks you own by buying more at a discount in a dip.
Dip buying should be on the upside
Buying dips gets done when we expect an overall uptrend to continue in a few days or weeks. As always, there are no guarantees. So we may expect a return to positive markets but that may not happen. We could be wrong.
To make sure being wrong does not cost us, we wait to buy. We need risk control. That means we have to play with caution as buying the dip may be wrong if it is the beginning of a downtrend.
If so, we are not capturing good value but immediately lose more money! We could suffer the pain of being wrong and the messy pain of trying to catch a falling market. Or recall the old stock market warning, “…don’t catch a falling knife!” Ouch!
Investors buy winners on dips
To be sure that buying the dip is good, we must have our homework done on any stock we want. To do that, check that there is no good reason why the stock price dropped. Ask questions and get answers.
Have earnings changed? How about the growth prospects? Any change in management, economic conditions, pending business? Have business operation or the outlook changed? Do we have a great company in an awful industry? Or does this look like a good deal.
If we have a good deal in hand we buy it on the upside. That means we wait until the bottom or lowest price has happened. We buy as prices recover and begin climbing back up. That makes sure our dip buying has the best chance to put us in a positive situation. So don’t buy on the way down but buy after the bottom and as the price rebounds. Buy on the upside.
Dips for trading not investing
For investors dips provide an interesting way to add to their bottom line. However, buying dips is not core long term investing strategy. Playing dips can be a core trading strategy but few traders use it well. It is a version of market timing.
If you snag a big winner at a bargain price during a dip you may be tempted to seek more of the same. Just don’t get drawn into any market timing strategy. Market timing does not work. All market timing strategies are short term flashes in the pan. They do not work nearly as well as long term investing does, period!
Prepare for the next dip
Dips happen and often arrive without making an early announcement. However the are some useful indicators that investors can keep an eye on. Those indicators offer no magic or guarantee as an individual or group of signals. Indicators are signals to pay attention but can not be counted on as a sure indication that a dip or recession looms.
However, paying attention to markets can make you more aware of the next potential dip or recession. These several indicators have regularly flashed useful signals of dips in time for investors to prepare a response. Those indicators are:
- Unemployment rising over a 6 months to establish a trend. This is a reliable and useful indicator. After 6 months of declining employment, be ready to run and cover. At least a dip can be expected but it could turn into a recession in the near term (withing 12 months).
- Housing starts trend down beyond one quarter. If this negative trend continues be ready for a recession within the year. A trend reversal can take this possibility away. However, before calling all clear, check the unemployment indicator. If it has turned positive, all may be well. But, if employment numbers and housing starts continue negative, stay defensive.
- Group of 5 Leading Indicators: often this group of economic indicators sends mixed signals. They generate as much frustration as they do clear reliable signals. But, when all give negative signals, a recession is more likely. However, that group signal can arrive after the recession is old news.
-
- Gross Domestic Product (GDP)
- Consumer Prices (CPI)
- Employment trend
- Retail Sales
- Housing Starts
- Inverted yield curve – this warning can flash as an early warning, more than a year in advance of any recession. But be cautious because early is not accurate. This indicator can be an early warning or head’s up, but can be of no consequence. I use it as a reason to do a portfolio review but stay the course unless other indicators also urge caution.
- Falling corporate profits – this trend can be a very early warning of dip/recession possibilities. If the downtrend continues into a second year, take cover! However, if the trend of falling profits reverses before then, a dip is possible, but a recession is unlikely.
Why this lesson matters
How investors buy dips matters because corrections are part of stock markets and present opportunities for sharp investors. Savvy investors need to manage dips to produce their best investing results. Knowing and using the correction management steps covered in this lesson can put money into your pockets.
Key takeaways from lesson 2,
How investors buy dips:
How investors buy dips finds three money makers during market corrections. Dips hare checkups, winners on sale and bargain buys for savvy investors.
- Corrections with 10% price drops happen regularly.
- Dips and corrections generate much meaningless market noise.
- Corrections are quick 2 to 14 week events about once a year.
- Cause, effect and timing of corrections has not been discovered.
- Dips give investors the opportunity for a checkup, review and hunt.
- First do a checkup on your portfolio holdings to decide if each should go or stay.
- Second, investors review holdings deciding to add more to any at discount prices.
- Dips are discount prices on any pending portfolio additions.
- Third, use corrections to check the market for buying bargains.
- Buy dips on the upside.
- Dip/recession indicators can give early warnings.
Other lessons related to:
How investors buy dips
Winston Churchill sees crisis opportunity
Research confirms your investment holdings count
Tapering groupthink costs investors
Investors can deposit and WAIT!
Comments and questions welcome
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Wealth Building Portfolio Management lessons:
Introduction to portfolio management Lesson 1
Pyramid portfolio wealth building Lesson 2
How investors buy dips Lesson 3
Distracted investing misses profits Lesson 4
Investors never average down Lesson 5
Market patterns repeat repeat repeat Lesson 6
Research confirms investment counts matter Lesson 7
Portfolio measurements to size positions Lesson 8
Growth protects investing profits Lesson 9
Winston Churchill said crisis = opportunity Lesson 10
Weeding your investment portfolio Lesson 11
Next lesson:
Distracted investing misses profits
Have a prosperous investor day!
Bryan
White Top Investor
[email protected] WhiteTopInvestor.com
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Copyright © 2013-19 Bryan Kelly
WhiteTopInvestor.com
About the Author Bryan Kelly
Bryan Kelly shares decades of experience to make stock market investing accessible to everyone. His knowledge guides investors to make money work for them and avoid mistakes seeking personal empowerment, independence, and retirement comfort. The About page tells the story of how a question from his daughter began White Top Investor.
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