Buying on the bottom is not really an investment strategy; Nothing is planned
Whenever the stock market falls for an extended period, market men and women find themselves almost stuck like a broken record advising retail investors to buy on dips. Or to put it in a slightly sophisticated way, it’s time to be brave when others are afraid.
For those unfamiliar with stock market terminology, the fact is that stock prices have fallen and stocks are available at a cheaper price than before and therefore need to be purchased. Now, just because a stock’s price has fallen doesn’t mean it can’t fall further and become even cheaper.
Given this, while bottom buying is an investment strategy, retail investors should also know in advance when the right time to buy is. This is because most of us only have a limited amount of money that we can invest at any one time.
But market men and women overlook this important detail and tend to stick to the generality of buying on dips. The reason they do this is simple. No one can know for sure in advance when stock prices will stop falling.
Also, in addition to suggesting buying on dips, market men and women should also explain what to buy. This important detail also seems to be missing most of the time.
Moreover, a stock market never falls into isolation. Similar to the start of 2020, stock prices fell due to the spread of the covid pandemic. Similarly, in 2008 stock prices crashed after it became clear that some of the world’s largest financial institutions were in trouble.
The recent stock market crash is because central banks across the western world have made it clear that the era of easy money is coming to an end and they plan to raise interest rates. This was followed by Russia attacking Ukraine, driving up oil prices and making the world a generally more dangerous place. While many geopolitical risk experts had been warning about it for years, no one could predict the details of the attack in advance. Therefore, when it happened, it surprised everyone.
Given the surprise and its repercussions, we may not be in a mental and/or financial situation to buy during a dip. Like when covid hit, people lost their jobs and incomes plummeted. In this situation, it was more important to keep what you had and not risk it by investing more in the stock market.
A similar situation occurred during the crash of 2008, when economic growth suddenly slowed and jobs and incomes were threatened. Of course, a lot of money came on the market after 2008 and even in the second half of 2020 and since, but that only happened in the coming months, once stock prices recovered slightly after the intervention of governments and central banks in an attempt to improve the economic situation a little.
Also, as an investor and writer, Morgan Housel said in a recent blog post, “I don’t think it’s possible to understand what a bear market looks like until you have one. lived one.”
The thing is, it’s not easy to be brave when others are afraid simply because there’s a reason others are afraid.
When it comes to the current stock market crash specifically, there are still too many questions that remain difficult to answer. Will Putin be arrested in Ukraine? Will Western countries enter into a direct confrontation? Will the central banks of the rich world slow the rise in interest rates and continue the policy of easy money?
The longer the war continues, the more pressure will be on stock markets and the global economy.
Nevertheless, if the central banks decide not to raise interest rates, the stock market could even possibly rise or remain stable for that matter. There’s no way to know these things in advance, despite the confidence market men and women project onto the television screen.
As The Economist put it in a recent issue: “Rather than profit, most investors lose money in wars.”
Given these reasons, buying on dips is not really an investment strategy.
At the end of the day, it’s worth remembering that while it’s important to take a higher risk investing in stocks to get a higher return, it’s not because a higher risk has been taken. that it will always lead to a higher return.
Vivek Kaul is the author of Bad Money.