When buying the dip doesn’t work: An analysis of the dot-com crash
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When buying the dip doesn’t work: An analysis of the dot-com crash
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Re: When buying the dip doesn’t work: An analysis of the dot-com crash
#2> Buying the dip isn’t some secret strategy. Time is the secret strategy.
Ah yes, the good ol' "time in market beats timing the market".
Of course, that assumes that markets trend upwards in the (very) long term. Which... if past performance is any indicator of future performance [0], the past 100 years provide a fairly compelling narrative.
[0] Another mantra: it's not.
Re: When buying the dip doesn’t work: An analysis of the dot-com crash
#3> Buying the dip isn’t some secret strategy. Time is the secret strategy.
There is a Dutch guy out there with some rotted tulips who begs to differ.
Re: When buying the dip doesn’t work: An analysis of the dot-com crash
#4The Federal Reserve has taken on $9 trillion onto their balance sheet to flood the economy with money.
https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
They’ve lowered short-term interest rates to effectively 0 and kept them there for quite a number of years.
Federal and State governments have flooded the economy with stimulus.
There is so much money that has been injected into the economy that it is no wonder that every asset has gone up so much. It is no wonder we have such high inflation. The trick now will be to stop it before we have a wage-price spiral where employees demand higher wages to compensate for higher prices which leads to even higher prices.
Expect the Fed now to be raising interest rates, taking $47.5 billion out of the economy per month starting in June and then $95 billion per month starting in September.
https://www.federalreserve.gov/newsevents/pressreleases/mone...
I think what’s coming is going to look at lot more like the dotcom bust than it will 2008. So I think the article’s caution on buying dips this time around is warranted.
Re: When buying the dip doesn’t work: An analysis of the dot-com crash
#5>Why has this strategy been so profitable and painless? Well, because stocks have been in a bull market for thirteen years.
If "buy the dip" works for a bull market, does "short the peak" work for a bear market?
Re: When buying the dip doesn’t work: An analysis of the dot-com crash
#6>Why has this strategy been so profitable and painless? Well, because stocks have been in a bull market for thirteen years. If "buy the dip" works for a bull market, does "short the peak" work for a bear market?
I would say so.
I predicted this bull-to-bear market transition to the day (it started on Sep 27 when the Fed announced rate hikes) and yeah, everything's the opposite.
Re: When buying the dip doesn’t work: An analysis of the dot-com crash
#7Buy the dip is always trumped by "don't try to catch a falling knife." If you can't tell the difference (I am not professionally trained to) then it may not be worth the effort.
Re: When buying the dip doesn’t work: An analysis of the dot-com crash
#8>Why has this strategy been so profitable and painless? Well, because stocks have been in a bull market for thirteen years. If "buy the dip" works for a bull market, does "short the peak" work for a bear market?
The problem is of course we don’t know how long bull or bear market will last.
If I was a betting man I would short everything I guess, but I’m not. I’m also sure there are others with way more knowledge on when it’s going to turn around.
Re: When buying the dip doesn’t work: An analysis of the dot-com crash
#9Nick Maggiulli:
> Logically, it seems like Buy the Dip can’t lose. If you know when you are at a bottom, you can always buy at the cheapest price relative to the all-time highs in that period. However, if you actually run this strategy you will see that Buy the Dip underperforms DCA over 70% of the time.
> This is true despite the fact that you know exactly when the market will hit a bottom. Even God couldn’t beat dollar-cost averaging.
> Why is this true? Because buying the dip only works when you know that a severe decline is coming and you can time it perfectly. Since dips, especially big ones, haven’t happened too often in U.S. market history (i.e. 1930s, 1970s, 2000s), this strategy rarely beats DCA. And the times where it does beat DCA require impeccable timing. Missing the bottom by just 2 months lowers the chance of outperforming DCA from 30% to 3%.
* https://ofdollarsanddata.com/even-god-couldnt-beat-dollar-co...
The thing about trying to miss the worst days (get out before the dip, get in after), is that the 'best' (recovery) days are often not long after, and if you miss just a few of those your returns get hosed:
> If you missed just the 25 strongest days in the stock market since 1990, you might as well have been in five year treasury notes.
* https://theirrelevantinvestor.com/2019/02/08/miss-the-worst-...
> This is actually a pattern, it turns out. The market’s worst days tend to be followed by its best days, according to research from J.P. Morgan Asset Management.
> If you sell when the markets hit the skids, you’ll likely miss the upside.
[…]
> According to J.P. Morgan’s analysis, the 10 best days over the past 20 years occurred after big declines amid the 2008 financial crisis or the 2020 pullback during the onset of the Covid-19 pandemic.
* https://www.cnbc.com/2022/03/09/you-may-miss-the-markets-bes...
Re: When buying the dip doesn’t work: An analysis of the dot-com crash
#10Look at a chart of the S&P 500 from 1920 to 2008 and you'll notice something rather curious: the stock market has gone parabolic ever since the financial crisis. What made this period so unique? Tremendously low interest rates coupled with quantitative easing dissuaded capital from financing the real economy and instead encouraged herding and levering up in the financial economy for returns.
At ever dip, it was an open secret the Fed would cut rates and ease again.
At least for now, that game is over. We've had moments in the past when the markets had a similar panic (see 2018), but this period is unique due to the inflationary backdrop. Since 2008 we've never seemed to be able to create significant economic growth or inflation greater. The COVID fiscal canon blew growth and inflation skyward. The fed can't just turn on the printers again or cut rates until we hit proper a proper recession.
That's when you buy the dip.
[0]: https://www.macrotrends.net/2324/sp-500-historical-chart-dat...