Buying the dips

Infrastructure

I frequently hear that an investment strategy for buying shares or cryptocurrency is to “buy the dips”.  How does this actually work?

I can see that if you have some money to invest, then you might hold on until the price of your targeted investment falls in price, then you fill your boots.

But that is just buying in one dip. How do people buy more than one? Surely they have spent all their money buying the first dip? Or are people spending only some of their money the first time, and holding some cash back to buy at a later date?  That doesn’t seem to make much sense to me.

Or, are people are accumulating sufficient money between dips to make worthwhile purchases on a regular basis? Where would this money come from?

 

eskbanker

Investing tends not to be a one-off activity for most!  Further funds can come from a variety of sources, earned income being the most obvious one....

Malthusian

Infrastructure said:

I can see that if you have some money to invest, then you might hold on until the price of your targeted investment falls in price, then you fill your boots.

Unless of course it never does - or not to your target level.

The reality is that when any asset is at the bottom of a dip, most people who believe in "sell the herp and buy the derp" will carry on sitting on their cash, waiting for it to fall even further. After all, there will be lots of reasons to be pessimistic about the asset - that's why it's at the bottom of the dip. Then it goes back up, leaving them still sitting in cash and waiting for the next herp.

Everyone thinks they won't be "most people" and nearly all of them are wrong.

But that is just buying in one dip. How do people buy more than one? Surely they have spent all their money buying the first dip? Or are people spending only some of their money the first time, and holding some cash back to buy at a later date?  That doesn’t seem to make much sense to me.

The idea is that you've sold in one of the rips so you use the money you've got in cash from selling at the peak.

Of course, most people won't sell in the rips because see above. When they're in a rip most people will think the asset is going to keep on going up. That's why it's a rip.

Or, are people are accumulating sufficient money between dips to make worthwhile purchases on a regular basis? Where would this money come from?

People who accumulate sufficient money to make worthwhile purchases don't try to get rich quick by day-trading. (Unless they're one of the Dave Portnoys of this world who like losing large amounts of money - but they make headlines for a reason.)

There is no evidence that anyone can consistently beat the market. This includes predicting when the market is at the bottom or top and selling / buying accordingly.

sevenhills

Infrastructure said:

I frequently hear that an investment strategy for buying shares or cryptocurrency is to “buy the dips”.  How does this actually work?

If there is a dip, such as after the EU referendum or COVID, then if you have cash at that time then you can invest if you believe that share will recover.

If buying in the dips is a good idea, then perhaps selling after a steep increase is also a good idea? If you have a share that has performed well and you are hoping to take your profit, a good time to sell is after a rise due to speculation in the media.

Infrastructure

Thanks Malthusian, of course, the money is made by selling at the high points. 
It seems obvious to me that without a crystal ball, this strategy can't work. 
What is strange though is that I never hear of people selling assets for a profit, I just hear about them buying assets at a low price. I suspect that when an asset falls massively in price, then I will hear more claims about how people sold at the high point.

vacheron

Infrastructure said:

But that is just buying in one dip. How do people buy more than one? Surely they have spent all their money buying the first dip? Or are people spending only some of their money the first time, and holding some cash back to buy at a later date?  That doesn’t seem to make much sense to me.

Or, are people are accumulating sufficient money between dips to make worthwhile purchases on a regular basis? Where would this money come from?

I'm a little concerned that NOT spending every penny you have on the first opportunity you come across "doesn't seem to make much sense" to you?

If you get a hot tip on a horse in the 3.30 at Kempton (or there is a special offer on electric toothbrush heads at the local supermarket) I'd assume you wouldn't spend ALL the disposable money you posses buying those either?

You weigh up the risks, assess them against the other potential uses for the money you have, and then allocate an amount based on your assessment, and probably a fair bit of your "gut feeling" about the opportunity you feel you have been presented with.

I buy the dips a lot with certain stocks (Barclays being one in particular) and the amount I invest depends on how I am feeling at the time, where the price is in relation to previous dips, and how much a larger purchase would contribute to pulling down my "average cost per share" paid for my entire holding. 

eskbanker

Infrastructure said:

What is strange though is that I never hear of people selling assets for a profit, I just hear about them buying assets at a low price. I suspect that when an asset falls massively in price, then I will hear more claims about how people sold at the high point.

You obviously haven't spent much time on this forum!  There are plenty of folk claiming to have sold assets for a profit (I certainly have!), whether traditional investments or crypto, although it's true that most discussion is about buying - a recurring theme is definitely the adage about 'time in the market, not timing the market' though, so don't be under any illusion that the holy grail of buying low and selling high is a straightforward proposition....

Novice_investor101

I sold £2k of Vanguard Global All Cap in May 2020 to buy £2k of Aviva shares. The vanguard was down on it’s highs but still in a gain. Aviva shares have risen from £2.40 to about £4 now. It was a calculated risk. I also piled about £2.5k into my usual global index funds in March 2020, just to bring my average cost down. 
I definitely made more in the short term selling Vanguard low & buying Aviva low. I’ll sell soon & have since switched the Vanguard into HSBC all world. The £3.5k I’ve now got in Aviva will be going there too when i sell up. 

Albermarle

It seems obvious to me that without a crystal ball, this strategy can't work

You have partly hit the nail on the head !

If you have strong discipline /nerves and buy when the market is crashing ( catching the actual bottom of the dip is very difficult ) and sell when markets are booming ( ie when there is no obvious sign of a crash on the horizon ) then sometimes you will get it right . However you will also sometimes get it wrong .

If you are lucky then you may get it right more times than you get it wrong.

Then again it could be the other way around and you would have been better off just investing in a boring multi asset fund and leave it alone for 20 years.

vacheron

Infrastructure said:

What is strange though is that I never hear of people selling assets for a profit, I just hear about them buying assets at a low price. I suspect that when an asset falls massively in price, then I will hear more claims about how people sold at the high point.

I think on an investment forum people will generally buy a lot more times than they sell on average, probably on a trading forum the ratio will more equal.

With shares as investments, people are often putting money away which they don't need right now "as and when they have some".
For many the hope is that the shares will grow over time, but by trying to buy the dips they are hoping to get a bit of a "jump start" on top of that underlying performance.
These people will often only sell if they need the funds for something, in many cases some kind of major life event which come along far less regularly than them having some spare cash available to invest, hence the disparity between buying and selling. 

Using myself as an example, I currently hold about 5,500 shares i received from my company sharesave scheme which matured last December at an option price of £5.60. These are currently trading at £15.20, which is a very fortunate situation, but I still haven't sold them because a: the company outlook still looks strong, b: if I did so I would be hit with a huge capital gains tax bill, and c: I don't have any need for that money sitting as cash right now being eroded away by inflation.

Some are no doubt selling to fund another speculative investment opportunity, but timing the dip of the share you need to buy to coincide with the peak of the share you intend to sell to fund it is very unlikely. 

 
  

Malthusian

Infrastructure said:

Thanks Malthusian, of course, the money is made by selling at the high points. 
It seems obvious to me that without a crystal ball, this strategy can't work. 
What is strange though is that I never hear of people selling assets for a profit, I just hear about them buying assets at a low price. I suspect that when an asset falls massively in price, then I will hear more claims about how people sold at the high point.

Lots of people attempt to time the market so there are lots of people who will happily post saying "I've just bought Share XYZ for buttons".

There is no evidence that anyone can consistently beat the market. The expected return of trying to time the market or day-trade is zero minus dealing costs. Most day-traders lose their shirt. This is why there are relatively few people saying "I just cashed in XYZ for a profit" - it doesn't happen very often.

This is especially the case with a pure zero-sum game like treading crypto. In a zero-sum game those who make profits are in an inherent minority. And the larger the profits made by the smart money, the smaller that minority will be. This is nothing to do with anyone's ability to predict the market, it's just maths. For one person to make a 10x profit in a zero-sum game, 10 people have to lose just as much money, or 5 people have to lose twice as much money, or an equivalent combination.

Buy-and-hold investors do often post in these forums about the profits they've made by buying diversified portfolios years and years ago and selling them years and years later for a profit. See any thread entitled "Time to dig up those squirreled nuts" or "What's the best way to withdraw my pension" or similar.