With the stock market more erratic than it has ever been there are trading strategies which though they were quite effective in the past may not be that good anymore. What do you think of buying stocks when their prices plunge hoping you'll profit when the prices bounce back up? Is it still a good strategy?
A very timely question, Rainman - given the way the markets are heading this week Reminds me of a Warren Buffett quote: "Be fearful when others are greedy and greedy when others are fearful". I still believe buying 'quality companies' (those you've fully researched and have confidence in their long term success) on dips, especially companies you already hold, is a good strategy. However, I don't sink all my available cash into a single trade. I keep cash in reserve in case they dip more. Yes, I may miss out on potential profits if they don't dip, but then another opportunity with another company I like won't be too far away.
Trading the dip is essentially an extreme form of technical analysis, and as such isn't in and of itself a bad thing to do. In fact, it's probably one of the most rewarding trades you can make from a TA point of view. However, recently I've been moving away from technical to purely fundamental forms of investment decision making, and I think that buying into a stock which you wouldn't take in good times, is madness to buy in bad ones. But there are exceptions to that, so I suppose ultimately it's a case of look at the specifics and go from here.....
Over here, there are some stocks the plunged in prices and later on bounced back to a good number. But there also some stocks that tumbled and never recovered like the PILTEL shares I have that started with 20 per share and now down to 1 per share. It remained in 1 per share for several decades now and I don't see any probability that it will go back to the 20 level.
You can't expect buy in dips in all formats of trading. sometimes, buy in dips. sometimes, sell on rise. sometimes, buy on rise. sometimes sell in dips. Depends on format, Buy in dips format normally works in Bullish market, In bearish market, buy in dips, more downfall.
Well, basing on the experiences of people I know, buying in dips have been very beneficial for them until now. Many have gained a lot through this strategy though some did not. I remember a relative who bought a certain number of stock when the price was low but wasn't able to gain anything from it for a long time. I don't know if he was able to rise from that downfall but I guess it doesn't really only depend on the hope that everything that falls down must go up. We should still be very careful in buying and not get too excited during dips. It's still important to research well on a company before buying any of their stocks. I think it pays well to invest in a well-reputed company. Their stock prices may be higher but the risk of losing is lower.
If you fancy yourself a trader more than a longer term investor, you're going to have a hard time trading in bad markets - UNLESS you can learn to be nimble - i.e. make money on either side of the trade, which in itself can be a very risky thing to attempt to do. Although we've had the worst first week of any year going back at least some 80+ years, no one knows for sure where we'll go from here. Some very smart people believe we've entered into the fairly early stages of a bear market, while others think differently. But it is all speculation either way - no one knows for certain. Although I have a very long time horizon, and keep most of my money invested in positions that I plan to hold for at least a while, I do a fair amount of short term investing / trading with a pretty small % of my money. One thing I notice about times like the last week we've had is how easy it is to make money on the downside on so many less than stellar investments and overpriced investments. But of course this trend may not continue. I could be wrong (and hope I am), but I'd guess that the fed would step in again and cut rates again (and even take additional measures if they felt it necessary) for one reason or another if things continued downward. I hope I am wrong - I think it's time they stopped interfering in the markets for a while, and let the markets here and abroad straighten themselves out. But I certainly wouldn't be shocked if they didn't.
