I noticed that one or more people who post on this board have stated that they do not buy more shares of a stock they own on dips.
It seems to me that if you’ve done due diligence and feel comfortable buying on a dip, aside from the risk inherent in buying any stock, it could be a very good thing to do. Personally, i like to do this and have had decent results.
Can anyone tell me why they do not buy on dips?
Can anyone tell me why they do not buy on dips?
I buy on some dips but not on others. Reasons for not buying include having enough of the stock already. Reasons for buying include an incredibly good price because Mr. Market really is confused. But in general, less trading is better than over trading. Often I set myself targets such as a 15% drop. I won’t buy unless the target is reached. One rule I like to keep is not to buy on more than two consecutive dips, Mr. Market might know something I’m missing.
Saul doesn’t like option talk but one alternative to buying on dips is selling covered calls on rises and buying them back on dips to create an income stream.
Each stock is different and needs to be treated accordingly.
Denny Schlesinger
One rule I like to keep is not to buy on more than two consecutive dips, Mr. Market might know something I’m missing.
I like that Denny. Thanks for sharing it.
Matt
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx
So long as I have not reached my maximum investible allocation of 8%, I will let a stock run to whatever allocation it goes to until my thesis is no longer intact or I find something much better to invest in. When I’m right, I end up owning a stock about 3 years. I’d love to buy and hold forever, but it never seems to work out that way.
A good example of buying on dips was Oneoke. My thesis was that
1. They were managing their finances well so they could maintain their dividend coverage ratio.
2. There is a trend of increasing reliance on natural gas as an energy source.
3. The market was unfairly punishing OKE for falling energy prices, while ignoring solid earnings.
Every time I got confirmation from an earnings report or other significant energy I news, I purchased the stock. Here’s how it worked out:
10/9/15 39.48
10/27/15 33.91
11/9/15 31.60
12/23/15 23.67
3/14/16 27.90
Current price = 50.21 ROR = 64% Time ~ 1.01 yr
The market was more concerned about energy prices than the actual business so IMO the stock was mispriced and I kept purchasing (even when I felt like throwing up), so ya if the thesis is still good, why not buy on dips?
buwlnkl
PS Most of the time the thesis stays in tact, the price goes up. I’m fine with that too.
PPS Long OKE
Here is a great buying on dip example: HCSG
Every time HCSG dropped below the 200 DMA was a good time to buy
http://softwaretimes.com/pics/hcsg-10-13-2016.gif
I just put in a pre-market order to buy 100 at $35. Not likely to execute but when the market opens I’ll change the price accordingly.
Denny Schlesinger
Long HCSG
Interesting question about buying on dips. It made me think about what I actually do on dips.
Say I’ve researched a stock that’s selling about $30 and decide I like it and its prospects and take about half of my eventual position there. If it moves up to $31, I’m pleased, that’s what I was hoping for after all, a stock that will rise. I’ll add a little to my position. If it goes down to $29, I’m pleased too. It’s the same stock I liked at $30, but I’m getting it a little cheaper on random fluctuation. I’ll add a little to my position.
If the whole market goes down a bunch for some unknown or imagined reason and my stock goes down a bunch too, I don’t worry about it, and will probably add. If it goes down more than the market because it’s a small, high beta stock, I don’t worry about that either usually, and may add a little then too.
However if the market isn’t going down, but my stock is, I do worry. I want to know why. If my stock dropped 15% (which would be from $30.00 to $25.50), contrary to Denny, I wouldn’t buy. I’d be very cautious. I’d want to know why this stock, that I thought would be going up, is down 15% in a market that isn’t going down. What’s the rational of the people selling? Does it make sense? I’d be very careful about adding. As Denny said, “Does the Market know something I’m missing?”
Saul
“Say I’ve researched a stock that’s selling about $30 and decide I like it and its prospects and take about half of my eventual position there. If it moves up to $31, I’m pleased, that’s what I was hoping for after all, a stock that will rise. I’ll add a little to my position. If it goes down to $29, I’m pleased too. It’s the same stock I liked at $30, but I’m getting it a little cheaper on random fluctuation. I’ll add a little to my position.”
What about a stock like Amazon? Its price is at about $830 today, and has had dips over the last several days of anywhere from approximately $3 to $7 per share. But the market in general has been down over the last several days as well. Have you been buying AMZN on these dips over the last several days? Or is that a bird of a different feather?
Hey az5speedy,
I would never dare speak to Saul, but I think movements of less than 1% are not dips, they’re just noise. In fact, I would categorize any movements less than 2-3% as just noise or, put another way, just normal daily fluctuations.
Matt
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx
Thanks Matt. I appreciate your post.
But, in Saul’s example he talked about a $30 stock going either up or down by $1. According your post, that would not qualify as a “dip” either. So, regardless of whether the Amazon price movement over the last several days is defined as “dips,” my question to Saul still holds: Has he been buying AMZN the last several days in light of the price decreases?
Right AZ. But a $1 price movement for a $30 stock is greater than a 3% movement. A $1 price movement for Amazon is significantly less. I would look at it in terms of percentages, not absolute dollars.
Again, these are just my thoughts.
Matt
MasterCard (MA), Nestle (NSRGY), PayPal (PYPL), and Verizon (VZ) Ticker Guide
See all my holdings at http://my.fool.com/profile/CMFCochrane/info.aspx
I define dips by percentage and not by absolute dollar amount. From Saul’s reply to my post I deduce that my dips are larger, percentage wise, than his. Also important to consider is the stock’s volatility and its personality.
I last added AMZN on September 12 at $763.46
http://softwaretimes.com/pics/amzn-09-12-2016.gif
Denny Schlesinger
What about a stock like Amazon? Its price is at about $830 today, and has had dips over the last several days of anywhere from approximately $3 to $7 per share. But the market in general has been down over the last several days as well. Have you been buying AMZN on these dips over the last several days? Or is that a bird of a different feather?
I think movements of less than 1% are not dips, they’re just noise. In fact, I would categorize any movements less than 2-3% as just noise or, put another way, just normal daily fluctuations. Matt
But, in Saul’s example he talked about a $30 stock going either up or down by $1. According your post, that would not qualify as a “dip” either. So, regardless of whether the Amazon price movement over the last several days is defined as “dips,” my question to Saul still holds: Has he been buying AMZN the last several days in light of the price decreases?
Hi Speedy, $3 to $7 moves for amazon are well less than 1.0% moves and I’m afraid that I hardly notice them. As Matt said, a $1 move in a $30 stock is more than 3%, but I don’t really get excited about those moves either (as I thought I was saying). To put it in perspective, a 15% dip in Amazon would be about $125 roughly. If Amazon dropped $125, I’d want to know what the heck was going on way before I’d rush out to buy. A move that big always makes me wonder what the market thinks it knows, and is reacting to.
A way to put high price stocks like Amazon into a more comfortable perspective is to imagine they had a 10 to 1 split. You thus have ten times as many shares as you had before at one-tenth the price. Your $3 to $7 moves on an $830 stock are exactly the same thing as 30 to 70 cent moves on an $83 stock. You certainly wouldn’t get all excited about those either, would you?
In my end of the September portfolio summary I did write:
I love the company, but I do feel my position is big enough now (at 14.1%) and I probably won’t be adding except perhaps tiny amounts when I can’t resist.
Saul
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Thanks Saul. That certainly all makes sense, and I appreciate the response.
Az5speedy
Well exactly! Buying on a dip without knowing the reason for the dip and its impact on valuation lacks any kind of logic.
In the case of UBNT, it was read-across from Ericsson reporting weak broadband equipment sales, especially overseas. Does anyone have the technical knowledge to know how that affects ANET, which I own, and UBNT which is on my watchlist?
Well exactly! Buying on a dip without knowing the reason for the dip and its impact on valuation lacks any kind of logic.
I disagree. JP Morgan’s Law of Markets says they will fluctuate meaning that dips are a normal part of price development. Worrying about each dip makes about as much sense as being euphoric about each price rise. Before you buy your first share of a company you should understand not just the “valuation” but more importantly the business model of your target investment. Unless there is a serious disruption to the business model dips are just part of the territory.
For example, for a buy and forget investor (TMF, Buffett), a 50% drop in a well run company is something to be expected. It would drive most of us crazy but 50% drops are quite normal in fast growing stocks.
I would not call Saul a hyperactive trader but he sure has a very successful quick trigger finger. Most nervous traders are much less successful than Saul. His style certainly calls for investigating any medium sized dip. I trust my business model analysis to get me through most dips.
Philip A. Fisher, author of Common Stocks and Uncommon Profits had a philosophy that can be summed up as “Give your stocks a chance” meaning let them run for a couple of years to see how your thesis works out. Of course, he didn’t have the Internet for instant buying and selling, he would have to telephone his broker.
Yesterday was a case in point. I had been looking at HCSG’s earning report (Tuesday, Oct 11) and listened to the conference call (Wednesday Oct 12). It sounded like business as usual but the stock dropped on Wednesday by $2.13, 5.4% which made no sense. On Thursday I opened my trading screen before the market opened and put in a buy order at $35 expecting it not to execute. The stock fell a further 3% to 36.23 before it bounced back. There was huge volume both at the close on Wednesday and the open on Thursday that I can only attribute to day traders closing positions on Wednesday, stop-loss orders triggering late Wednesday and early Thursday, and maybe even some margin calls. Here was an 8% opportunity and no time to think and worry, you had to trust yourself. This was not a valuation issue, it was the market doing its thing. My buy order executed at $36.50.
http://softwaretimes.com/pics/hscg-10-14-2016.gif
Denny Schlesinger
Common Stocks and Uncommon Profits by Philip A. Fisher
https://www.amazon.com/Common-Stocks-Uncommon-Profits-Writin…
Yesterday was a case in point. I had been looking at HCSG’s earning report (Tuesday, Oct 11) and listened to the conference call (Wednesday Oct 12). It sounded like business as usual but the stock dropped on Wednesday by $2.13, 5.4% which made no sense. On Thursday I opened my trading screen before the market opened and put in a buy order at $35 expecting it not to execute. The stock fell a further 3% to 36.23 before it bounced back.
Hi Denny, I’d agree with you 100% on a case like this. You read the earnings report, listened to the conference call, and decided there was nothing wrong and you took advantage of the drop. I’d do the same. Both of us had the procedure of being clear on the current status before acting (in this case it was hypothetical for me as I don’t have a position in HCSG).
Saul
Denny - why do you prefer HCSG over AWS which is of a similar size and sector and with a good BMW record of its own? Or do you have both as strong growth picks and shovel plays on the healthcare sector?
Thanks
Ant
Ant, I don’t know what AWS is. No such ticker symbol. Typo?
Denny Schlesinger
Ant, I don’t know what AWS is. No such ticker symbol. Typo?
Denny Schlesinger
AHS ?
Yeh sorry = AHS - AMN Healthcare Services.
Ant
