Buy the dip
Keep Accumulating
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This has now become an yearly ritual — exactly one year back, we had issued our buy the dip report when the S&P 500 was down 10% from it’s ATH as Trump had just started yet another trade war. Barring the global financial crisis, it was the worst start to a presidency in the last 50 years. Yet, one year later, the S&P 500 is up 13% (and 27% up if you had bought the liberation day dip).
We are once again looking at a similar playbook with Trump doing something irrational causing the market to drop. YTD, S&P 500 is down ~9% and QQQ is now down 12%.
One of our favorite thought experiments during times of extreme market uncertainty and fear is:
What trades do you expect to regret not making this week… a year from now?
The key question in a market correction is whether to wait out the storm before investing again or double down and buy more?
To find out, let’s consider three investors: Cautious Charlie, Average Andy, and Daring Dave.
Each invests $100 in the S&P 500 at the beginning of every month. When the market falls below 10% of its previous all-time high (correction territory), each investor reacts differently to the dip.
Cautious Charlie “holds” - He stops investing, holds the cash, and waits till the market crosses the threshold again to deploy the capital.
Average Andy “stays” - He continues investing as usual.
Daring Dave “doubles” - He invests double the usual amount till the market crosses the threshold again.
Who did better?
Here’s how they would have performed if they started investing in 2000:
At the end of 25 years, Dave, who doubled down during all the drawdowns, would have had the highest return, at 523%, compared to Andy’s 453%. Finally, cautious Charlie, who waited for the market to “stabilize” before deploying his capital, would have had the lowest return, at 295%.
This stark difference in performance is due to the underlying behavior of the stock market. According to JP Morgan, just missing the 10 best days in the stock market over the past 20 years would have dropped your return from 548% to 197%.
The kicker? Seven of the 10 best days took place in bear markets. Cautious Charlie, by trying to wait out the worst unknowingly missed out on some of the best days as well. Daring Dave, who bet hard when the markets were down, came out on top over the long run.
Baron Rothschild, an 18th-century British nobleman, is credited with saying, “Buy when there’s blood in the streets, even if the blood is your own.” He should know — He made a fortune buying during the panic that followed the Battle of Waterloo.
The worse things are in the market, the better your chances of finding a great deal. And things sure do look bleak now…
Disclaimer: This is not financial advice or a recommendation for any investment. The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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With oil still elevated I’d wait until this dip really bottoms out. $6000 isn’t insanely unrealistic to see before it starts to climb again. More on my page about this.
A return only view of a strategy is the worst thing you can advocate. People should run from people who do that, but greed and fomo is what you are probably trying to invoke. Just shameful. Put the CALMAR ratios against those returns and discuss that in equal measure.