What Does “Buy on the Dips” Actually Mean?

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Several folks have asked me over the last few weeks what does phrase “buy on the dips” actually mean.

The official Investopedia definition is:

A slang phrase regarding the practice of purchasing stocks following a decline in prices. After a significant dip in the price of a security or stock index, investors should increase positions or purchase different stocks to capitalize on what is seen as an eventual upswing.

In other words, it’s like having the ability to buy a stock (or index fund) while they’re on sale. Nothing more, nothing less.

For example, take the S&P 500 index over the last 12 months.

sp-500-2008-2009-market-sell-off-buy-on-the-dips-example

When the market was in free fall, no one wanted to own stocks. Even long time investors were piling out of the market in February and March, only to jump back in in April or May when the news reports had a more positive vibe. Exactly the opposite of what they should have been doing.

However, there were a select few out there who were taking advantage of the situation, and slowly dollar cost averaging themselves into the market by accumulating individual stocks or index funds they still believed had a promising future after several consecutive market sell offs.

The only difference was that they saw through the negative “doom & gloom” news, exercised chessmaster like patience, and bought stocks when the S&P was in the 700 to 900 range instead of buying in the 1300 to 1500 range. In the end, it gave them a 40% to 50% discount on their buy in price.

Another example would be Ken Lewis, CEO of Bank of America, who bought 400,000 shares of his own company when the news surrounding BAC couldn’t be worse. The financial sector was about to collapse, the credit markets were frozen, and Bank of America was suspected of being nationalized.

However, he quietly stepped in and bought over a million dollars of his own company’s stock that hadn’t seen the $4 dollar mark since 1984.

bank-of-america-bac-ken-lewis-insider-buying-during-financial-crisis1

As you can see, Lewis (and several other BAC executives) didn’t buy at the exact low point, but they accumulated shares at a very low stock price not seen in 25+ years. And now, they have effectively doubled (possibly tripled) their investments in only four months.

How about you? Have you ever considered adopting this strategy beyond your typical biweekly 401k or Roth IRA contributions? Were you successful?

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Disclosure: I do own S&P 500 index funds for my personal portfolio at the time this article was published.