There is a very long and very interesting post on the forum which covers the strategy of “buying stock on the dips” in great detail. This particular strategy is not new, is something many people have looked at and while it does have its advantages and disadvantages, it can be lucrative going forward. So, why is it sensible to buy stock on the dips?
Over exuberance is everywhere
On the upside and the downside over exuberance in the stock market is there for all to see and a very easy trap to fall into. We can all remember stocks which have made positive announcements which have seen the share price pushed to new highs which look a little “overstretched” based on what has been announced. This “over exuberance” cannot last forever and at some point the profit takers will come in and the stock will “cool”.
The idea of buying on the dips is to take advantage of short-term profit taking to build up your stake for the longer term. Sometimes the “cooling period” can itself be overextended and the shares not only become better value but perhaps oversold. So, sometimes it does pay to wait and try and catch a stock when the profit takers decide to pull the plug on their short-term profits.
Keep your eye on the long-term
It is okay buying stock on the dips but what if the dip represents the top of the share price in the short to medium term? Has the stock run its path? Is all of the good news now in the price with no new announcement expected in the short to medium term? In order to make good money from buying stocks on the dips you need to keep your eye on the long-term and prospects for the company. Do the long-term prospects for the company still offer significant upside on the current share price?
There may be opportunities to buy on the dips and sell to make a short-term profit, which nobody can argue with, but to take maximum advantage of buying on the dips you need to have a long-term strategy in place.
Don’t obsess about short-term price movements
There is nothing wrong with watching a share price but to over obsess with a share price that may move by give or take 10% over a short to medium term period is crazy. It may be difficult, but the most successful investors of today and yesteryear are the ones who are able to discount short-term price movements as long as the long-term picture remains in place. If the share price is volatile in the short term and the long-term prospects may have diminished or evaporated, that is a whole different ballgame, it may well be time to sell.
The medium to long-term prospects for any share price are dictated by the underlying fundamentals while the short term performance can be impacted by anything from overall market movements to rumours and speculation. You need to decide whether you’re in the camp of a short-term trader or a long-term investor who may well take the odd short-term profit if it appears.