Markets have recently dipped after reaching record highs, leaving new investors, who’ve only seen rising markets, feeling uncertain. Experts are advising "buying on dips," but this strategy is risky, as stocks may still be overpriced, and further declines are possible. Investors should consider their financial situation and avoid relying on general advice.
Markets have corrected over 6% and investors maybe considering buying on dips. But is that always the best strategy?
A little under a month back, on September 26, 2024, the BSE Sensex, India’s most popular stock market index, peaked at an all-time high close of around 85,836 points. It has fallen 6.5% since then and closed at around 80,221 points as of October 22, 2024.
In comparison, the NSE 500 Total Returns Index, which is a much broader representation of the Indian stock market and takes dividends given by companies into account as well while calculating returns, has fallen by 6.9% during the same period, suggesting that the small and midcap stocks on average have fallen much more than the large-cap ones.
Now, this has led to two things in the stock market. First, it has got the investors who have entered the stock market only in the last few years a tad worried, though it hasn’t yet set the cat among the pigeons. There are a large number of investors out there who have only seen the market go one way in their investing lifetime, and that’s up.
As of December 2019, before the COVID-19 pandemic broke out, the total number of demat accounts in the country had stood at 3.94 crore. As of September 2024, the number had shot up to 17.54 crore, implying that more than three-fourths of the demat accounts currently in existence have been opened only in the last five years.
So, it’s safe to say that most Indian investors lack any experience of a market cycle. And that lack of experience will probably go against them unless they think through things properly and not just get influenced by their limited experience and the noise on social media and mainstream media.
Second, it has got stock market experts, those who appear on TV and different digital mediums and offer their views on what they think about the current state of the stock market, to start talking about buying on dips. This is standard operating procedure for stock market experts.
Whenever the stock market falls a little, this terminology is thrown around. It means that stock prices have fallen and thus are cheaper than they were before and thus it is a good time to buy.
The trouble is it is never as simple as that.
First, just because stock prices have fallen a little, doesn’t mean that a particular company’s price justifies the prospect of its future earnings or even its business model for that matter. Even after the fall, the price might still be very high. Now, this is a basic point that nobody bothers explaining given that the idea behind most communication that happens on TV and other mass media is to keep things as simplistic as possible. There is no scope for nuance.
Second, if buying on dips is a viable investment strategy, retail investors must also know in advance when exactly is the right time to buy. This is crucial because most of us have a limited amount of funds available for investing at any given time. What if we buy on dips and then the market keeps falling more?
Third, market experts often overlook this crucial detail and stick to the general advice of buying on dips. The reason is straightforward: no one can predict with certainty when stock prices will hit their lowest point. And as I said, any communication over a mass market medium has to be simplistic and lack nuance. The average human brain doesn’t process nuance very well.
Fourth, in addition to recommending buying on dips, market experts should also explain what to buy. Unfortunately, that critical detail often gets overlooked. This is very important because most of us only have so much money going around and the fact that despite the fall the share prices of companies might still be overvalued. Of course, in some cases, the market experts are not allowed to recommend specific stocks to the public and that forces them to stick to general banalities, which may sound sensible, but like any other general banality don’t really mean much.
Fifth, as Jason Zweig writes in The Devil’s Financial Dictionary: “Although not all dips turn into disasters, nearly all disasters begin with a dip. Investors who believe that “buying the dips” is a recipe for success should be careful what they wish for; there may be more dips to buy than you have the willpower to withstand.” Now, this is not to suggest that the current dip will turn into a disaster. The fact of the matter is I don’t know. But it’s a factor that needs to be kept in mind by anyone thinking of buying on dips. For one you should not touch your emergency funds to buy on dips. Also, you should stay adequately diversified given the risk levels you are comfortable with. Or as Morgan Housel writes in The Psychology of Money: “The foundation of, “does this help me sleep at night?” is the best universal guidepost for all financial decisions.”
Sixth, the trouble with most general financial advice is that it doesn’t take the uniqueness of every individual’s financial situation into account. Now, sometimes stock markets fall because the broader economy is not in good shape. In that situation, jobs might be on the line. Now, should an individual whose job is on the line, be buying on dips? I don’t think so. Or as Morgan Housel writes in The Psychology of Money: “There is no single right answer; just the answer that works for you.” This factor should be kept in mind as well.
Seventh, this does not mean that buying on dips doesn’t work for anyone. That’s clearly not the case. There are value investors out there who like to sit on cash and then pick up stocks that they think are worth their while once the price has fallen to levels they are comfortable with. Of course, such individuals have done their research over the years and are psychologically much stronger than the average investor who seeks advice from stock market experts.
Disclaimer: Views and opinions expressed in the article are the author's own and do not reflect those of Upstox.
About The Author
Vivek Kaul is an economic commentator and the author of Bad Money.
 (1) (3).jpg)
