The B.S. Behind 'Buying The Dip'
/On Monday, March 9, the U.S. stock market was down nearly -20% from its record high that was recorded just three weeks prior on Feb. 19.
With stock prices falling so sharply and quickly, you will hear others say that they are in the midst of buying stocks. They will call it a buying opportunity. They may even recommend that you, too, should buy the dip.
The message itself may be valid but the messenger is full of B.S.
Let me explain. We know that the stock market goes up in the long run so, theoretically, I could argue that we are in a continuous buying opportunity if you are a long-term investor.
As for the messenger, if someone says to me,“You know, with stock prices down, this is just a great buying opportunity!”, I would ask them:
“Oh really, you have a lot of cash ready to invest?”
Their answer better be “yes” because if not then it is just rhetoric. Their actions and words do not align. So supposing they say “yes” and are primed to buy stocks at a perceived discount, 1 of 3 things must be true:
They just obtained the cash they plan to invest
They have had the cash for some time, but for whatever reason had yet to invest
They recently sold stock and have cash to reinvest
Odds are #1 does not apply. It is unlikely this person just-so-happened to obtain a chunk of cash as the market is plunging.
If #2 applies and their cash has been on the sidelines until now, how long has it been and more importantly, why?
The longer that cash sat idle, more opportunity was missed to earn a return. Now they suddenly want to invest it? Again, actions speak louder than words. From our interactions with clients and non-clients alike, a reluctance to invest usually stems from fear of putting money into the market at the quote-unquote “top”, only to risk then losing money. What about this person’s past investment behavior suggests they suddenly view a precipitous market drop as a buying opportunity?
The truth is, they don’t.
This leaves #3 as the only explanation left — they have cash to invest because they recently sold stock. To which I would ask, “Why did you sell in the first place?”
There is an outside chance they sold before the market’s decline and are ready to jump back in at reduced prices, but I doubt it.
In managing money for our clients, we actually did make some defensive moves within client portfolios prior to the market’s decline. One of those involved building up a cash position, as the result of selling some stock positions before the market decline was in full flux.
But I would refrain from calling right now the time to buy because I really don’t know. Nobody does. There is little precedent for what has happened the past 3 weeks. Many people will compare it to 2008, but that is inaccurate.
What most people remember about 2008 is what occurred in September thru November of that year. That is when the market’s sell-off accelerated as major financial institutions like Lehman Brothers, Washington Mutual and Wachovia all filed for bankruptcy in the wake of the subprime mortgage crisis.
What most people do not realize is that the stock market had actually peaked nearly 1 year earlier and was already down roughly -20% from its peak by the time Lehman Brothers went belly-up in September 2008.
Compare that with today, where it took less than 3 weeks for the S&P 500 to fall -20%. There is not much of a comparison. A better comparison is July 2011 when the S&P 500 fell -17% in just 11 market days. But only those in our industry would remember that.
Now, back to the guy/gal who says they are buying-up stocks with both hands…
If this person truly did sell a ton of stock right before the market drop and have been waiting 3 weeks to deploy it back into stocks, more power to them. But you should know better. There is a difference between what someone says and what they do.
Will they actually have the guts to buy as the market is tumbling?
Will they invest all of that cash or just some of it?
If they do buy now but the stock market has yet to fully bottom, will they hold onto their newly purchased stocks and ride out future losses until they eventually turn a profit? Furthermore, does that even qualify as buying the dip if the stock market isn’t done dipping? I digress…
I am skeptical of this person in the same way I am skeptical of someone who tells you about their successful investment decisions but never mentions their failures or losses.
I cringe a little when someone parrots that this is a buying opportunity because it is not smart or even compelling, it is disingenuous at best. As an investment management firm, we are relentless in our market analysis and I will humbly admit that we do not know how long the market will flounder or how much lower it will go before bottoming.
In the meantime, if the market does trend lower and continue to break down, we will respect that and continue playing defense. When the market eventually recovers (by our estimation) we will go on offense. Either way though, our actions will speak louder than words.
Consider this before taking advice from someone who tells you to buy the dip.
Brian E Betz, CFP®
Principal