Take a profitable dip
Today in Part 6 of the seven part White Top View series: Playing Market Odds, we cover how superior investors profitably play dips to play market odds while avoiding common investment errors. The series discusses how superior investors play market odds and avoid common investment errors. Links to all seven parts of the series are at the end of this post.
A reader asked, “Are you saying never buy dips?” and another “Tell us how to play a stock price dip.”
Both good questions. Dips offer excellent buying possibilities. Think of a stock price dip as either good or bad depending on the context. Buy the good, sell the bad.
A good dip presents a gift of profit but a bad one vaporizes capital
So, yes, do buy good dips, a very profitable strategy. We just need to buy the right dips and sell or avoid the wrong ones. Guidelines and doing our homework can sort that out.
Price dip triggers:
News – the facts change
Rumor – true or false
Opinion – analysts or large investor
Fatigue – shareholders tire or give up
Trading – indifferent, sloppy or emotional
Most price dips have one of three basic causes. Dips can happen when news, an analyst or large investor goes negative on a stock. The facts or comments and selling can trigger a price dip or sharp price decline. Those first selling ahead of everyone else on bad news can win. They avoid the big price dip and losses as others pile out.
However, when wrong they leave significant money on the table. That can present an opportunity to buyers who are ready. Ready means homework done. You have heard this before, do your homework. No time spent in any other activity will pay off in more dollars for you than doing your investing homework.
The unexpected nature of price dips means investors that are ready, profit most. Price dips are surprises triggered by a mix of fact and emotion. However, very often the “fact” is opinion or comment of an investor or analysts. The negative comment or opinion may express frustration or impatience. Emotion rather than any important change in facts to the negative for the company.
We need to take the information in context and judge its importance. Each time new information arrives, first, put it in the bigger picture. What are the possible effects? Are we looking at something important or a minor issue. Is it simply market noise?
If the market and economy are positive, and no fact or evidence about the company or market has changed. Price declines can represent opportunities to buy on a dip.
However, even if we are optimistic and think all the facts favor the company, we could be on the wrong side of the market. If the broad market sells off, what we think does not matter. When broad market or economic facts in the news make you think things have changed. They may have. If so, when the price is falling we have to consider selling to save our capital.
Going against the market when the trend changes or “fighting the tape” is a fast way to bankruptcy. We must make ourselves aware of the general economy, the market and our specific company. When they all go negative, the market is telling us being long is wrong. When the market says we are wrong, believe the message. Sell.
Consider the scale of the news or event
Affects only the company?
Affects the company and stock market?
Significantly affects all including the broader economy?
When the effect of any news goes beyond the company be very careful. With any situation of broad and significant economic or market impact, only buy stock on positive news. In the case of negative news, with broad impact, the best case scenario is hold. More likely selling is the better strategy.
In this post the question is around buying the dip. That is the positive side of the story. On another day we can discuss the various downside strategic responses.
When the news remains positive for both the economy and the market we can make the company our sole focus. In that case even bad news or a negative opinion may still create a buying opportunity.
As an example, Norbord, which we discussed yesterday. There is some negative opinion about the company, but not a negative consensus. I recommend staying in NBD. Long-term I have profitable expectations.
Next in Part 7 of the White Top View series, Playing Market Odds, we discuss two important characteristics of superior investors, doing homework and using facts.
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Links to all parts of this series follow: