Broker Check

Buying Dip

April 03, 2020
Share |

When life was a little less busy my wife and I had a Thursday night weekly date to go drink margaritas and wander around some local stores. We’d always go to one of the big-name hobby stores and I would provide color commentary on the ridiculousness I would see. Everything in the store is selling for 50% off…all the time. If it’s always 50% off, then it is never 50% off. Hopefully when people buy this stuff, they don’t think they are getting a deal. Apparently after a couple of $5 El Presidentes I can put on quite the show.

This is not to say that we don’t shop there. We get stuff for school projects, for different crafts we’re doing around the house, and gifts for others that can’t kick their crafting habit. We just don’t buy thinking we are getting a deal…unless we use the additional 40-50% off email coupon my wife gets. People love to buy things at a discount and get the best deal we can. To know if you are getting a deal, though, you must know the true value of what you are buying.

There has been a lot of talk about buying the dip and how stocks are selling at a discount. It is true that this can be an unprecedented opportunity, especially for younger investors, to invest in companies at prices that we haven’t seen in years. It is important to know that not all these companies are discounted though. There will be companies that were simply marked up in our historic bull market heading into this crisis. Significant assumptions are built into company valuations and any change in those assumptions will create large swings in the stock price (See: TSLA).

Market adversity will expose the weaknesses in certain businesses. Some businesses will not make it out of this. Some are positioned to weather the storm and possibly consolidate their share of the market. Some may even get a taxpayer funded high five to keep charging us for poor customer service and carry-on luggage. Keep these things in mind when you step into the super stock market emporium looking for discounts.

I am not saying that you should not invest right now. What I am saying is don’t buy things only because they have a 30, 40, or 50% off tag on them. Just like going to the craft store, don’t buy stuff you don’t need because it was on sale only for it to be garbage in a few months anyway. Keep your goals in mind and play the long game with regards to investing. If you are discount shopping the market right now also keep your total portfolio in mind as you add positions. Modern portfolio theory still applies in good markets as well as bad.

In case you weren’t already tired of hearing the word unprecedented…this is unprecedented. There is no guarantee that we have seen the bottom of the market. Nearly 10 million Americans filed for unemployment in the last few weeks and those numbers are likely to get uglier. My last bit of advice about buying the dip is…make sure your financial house is in order before putting your cash to work in the market. If you are positioned to take advantage of the current market situation, that is great. If you are not in that position, and you need your cash to keep the lights on and the fridge stocked, it is alright to sit this one out. There will be opportunities in the future. That is the nature of the beast. Until next time, be safe and order those El Presidentes to go.