Last Updated on April 7, 2023 by George
The advice to “buy cheap and sell high” has led many to believe that the stock market is simple. However, there is substantial evidence to the contrary. Modern retail investors are equipped with sophisticated smartphone apps and the ever-popular adage “buy the dip.”
Taking investment advice from Reddit may not be everyone’s cup of tea, but it is worthwhile to investigate whether this meme represents a viable investment approach. Understanding what it means to “buy the dip” and whether or not one should do so might provide insight into profitable investing.
The idea behind buying when the market falls is to acquire shares at a lower price than they will eventually attain. While most equities tend to rise over time, adopting this move during market declines enables an investor to profit.
Even though there is no assurance of success due to the unpredictability of the stock market, this method is still worth exploring. It would not have become a meme if it were always the most excellent advice available.
Where Does the “Buy the Dip” Meme Come From?
The expression “buy the dip” has been around for decades, popularized by Forbes and debated as a viable investment technique. It became an internet phenomenon until r/wallstreetbets rose to prominence in 2021. On Reddit, subreddits are communities devoted to a specific subject, such as
Wallstreetbets, founded in 2012 to educate newbies about investing, track markets, and share success stories. But, since then, this tendency has undergone significant alteration.
WallStreetbets had roughly one million members at the beginning of 2021. Still, its popularity exploded when the market for $GME was overwhelmed with cash and media attention, driving its share price from approximately $19 to nearly $380 by the end of January.
Currently, Wallstreetbets has more than twelve million users and is dominated by memes; if you’ve heard words such as “diamond hands” or “to the moon,” you’ve probably heard of Wallstreetbets.
Who is Buying the Dip?
Generally, investors utilize this cliché to justify maintaining their stake despite a price decline. This could be due to various factors, but they also have the incentive to portray the decline as temporary. The “buy the dip” investing strategy is supported by a survey of over 2,500 investors with $1 million or more in assets conducted by UBS Group AG. Thirty percent of respondents said they would increase their position if markets declined further, while twenty percent said they would reduce their exposure.
Despite its great popularity and success stories, there needs to be more evidence to suggest that the average investor should adopt this technique. Even with sophisticated algorithms, it is exceedingly difficult to precisely estimate when a stock’s price is nearly bottoming out during a price decrease.
Hence, it becomes more of a gamble for casual investors; data suggests that a more deliberate strategy can be more rewarding. In his study for MarketWatch, Nick Maggiulli demonstrated that purchasing the dip can sometimes beat traditional investing; however, when it loses, it loses big.
How to Buy the Dip Safely
The fear of missing out (FOMO, another investment-related cliche) occasionally prevails, and you will want to buy a drop in the belief that the stock will soon climb again. If you are going to employ this method, there are a few precautions you should take:
Ensure the stock is not in freefall: This may sound apparent, but if it has been falling for weeks or months, there are better times to purchase it.
Look at the company’s fundamentals: A stock price decline does not necessarily indicate that the underlying company is in peril. Even if the market is briefly down on its shares, you should research to ensure you are investing in a firm with a solid future.
Have a selling plan in place: This may sound contradictory, given that you are buying low and intend to hold the stock for as long as possible. However, having a selling strategy in place will prevent you from becoming emotionally tied to the stock and making rash judgments.
If you are still uneasy about purchasing the drop or are uncertain about the fundamentals of a particular company, avoid investing. The stock market is volatile, and even if you adhere to all these principles, there are no guarantees.
Pros and Cons
- Possibility of acquiring shares at a discount
- Capability to profit from market fluctuations
- Possibility to expand stock holdings when prices are low
Final Thought – Buying The Dip Meme
Your uncle may tell you that your cousin’s college classmate made out on GameStop, but buying the dip is not a foolproof way to become wealthy quickly, and it has the potential for both earnings and losses.
Before making a purchase, it is advisable to conduct research and thoroughly understand the item. Buy the dip memes make investing seem simple, but remember that if it seems too good to be true, it probably is!