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The Science of Hitting
The Science of Hitting
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Buy The Dip

Thoughts on a recent Bloomberg article

October 17, 2017

Bloomberg published an article on Monday titled A Crazy Stock Market Is Punishing Sellers. Heres a quick summary: The absence of volatility, combined with uninterrupted stock market gains, has led market participants to embrace their speculative side. There were a few comments from the article that I would like to discuss.

'Buy the dip'

The first comes from Benjamin Dunn, the president of Alpha Theory Advisors:

We certainly all joke about it: Buy the dip, thats what weve been conditioned to do. Now you kind of have to do it. Itd almost be irresponsible not to.

The word irresponsible caught my attention. It suggests a certain inevitability to the conclusion: just accept it and dont ask too many questions. The same tone has been prevalent in a similar argument the stock versus bond debate for a few years now (What else can you own beside stocks? They're the best house in a bad neighborhood). The decision has been backed into due to a lack of sufficient alternatives; its not really a choice if theres only one agreeable option.

It reminds me of what another commentator said about FANG stocks a few weeks ago:

I think FANG will define our generation. These are the companies that, well, if youre not involved in them, youre not really an investor.

That level of certitude is astonishing These are stocks you must own, and youre a complete buffoon if you dont get on board. Notice how valuation plays no role in the decision just buy them and everything will work out. I wasnt around for the Nifty Fifty or the tech bubble, but its porbably safe to assume this is only a slight variation of what was said in those eras.

One interesting thing about the buy the dip mantra is that there havent been any dips: In the past year, the single biggest drop for the S&P 500 has been less than 3%. To put that in perspective, the average intrayear decline over the past two decades has been in the mid-teens (even if you exclude the nearly 50% intrayear decline in 2008, the average is still well into double digits).

To account for the inconvenient lack of volatility, maybe we need to update buy the dip to a slogan that seems more appropriate in the current environment "buy stocks at any price, always." Well see whether the "buy the dip" crowd sticks to its guns when a real dip inevitably appears.

As it relates to the FANGs or any investment this comment from Howard Marks (Trades, Portfolio) seems timely:

The one thing I know about investment markets is that theres no such thing as a permanent good idea. The definition of a good idea changes as the market changes, as prices change.

Price action

Heres another blurb from the Bloomberg article:

Among investors, the panic [after the Brexit vote] was palpable, and some were paralyzed with fear. But almost as quickly, the markets roared back and jolted investors out of their crisis-era fatalism. Since then, naysayers selling into any weakness have looked like suckers. In the aftermath of other post-crisis upheavals, we got a lot of incoming client calls, Connors said. But that all ended with Brexit. Now, even though the events seem dire, volume is low and reversals are sharp. People are looking through to things that keep them long. Buy-the-dip is in place.

When the validity of an argument is judged solely on (short-term) price action, investors have taken their eye off the ball. As the daily fluctuations take center stage, remember Warren Buffett (Trades, Portfolio)'s thoughts on the formation of bubbles:

The only way you get a bubble is when basically a very high percentage of the population buys into some originally sound premise and its quite interesting how that develops originally sound premise that becomes distorted as time passes and people forget the original sound premise and start focusing solely on the price action.

The originally sound premise for common stocks in the past few years has been that they deserve to trade at a higher-than-average multiple since long-term (10-year) Treasurys yield a paltry 2.25% (and thats a nominal yield). On a relative basis, stocks appeared much more attractive than bonds. That argument still holds today but its less convincing than it was three to five years ago. If stock prices continue to outpace intrinsic value, we will eventually reach a breaking point.

Even if you're convinced on the relative valuation, it's less clear (at least to me) that the absolute returns from owning common stocks will be attractive over the next decade. Whats also unclear is whether people have suddenly developed the ability to weather bouts of volatility with equanimity. Sadly, the average investor will likely act as he did in the past when the next correction comes.


As noted in the Bloomberg article, Naysayers selling into any weakness have looked like suckers. Thats a good reminder of one of the most important lessons in investing: If youre not willing to look like a sucker in the short term, you better stick with the crowd. If youre going to deviate from the index / market, you better do so with a clear understanding of the "pain points" that entails.

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Thomas Macpherson
Thomas Macpherson premium member - 2 years ago

I can remember attending an alumni meeting in late 1999 and being roundly abused for touting the value of two companies - Fastenal and Expeditors International. One individual said something along the lines "Tom, your investment career is going to be defined by missing out on technology. You will never make it big investing in widgets." Little did he know how right he was - just not in the way he was implying. Interestingly he went on to be a senior executive at a large brokerage house and was famous for saying in late 2007 "I've never seen such opportunities in financials. Buy on the dip. This is a once in a lifetime opportunity". Again, he was correct. Again for all the wrong reasons. He got promoted later that year.

Disclosure: I own both FAST and EXPD in a family trust where I provide investment advice.

The Science of Hitting
The Science of Hitting - 2 years ago    Report SPAM


:) Great anecdote - thanks for sharing Tom!

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