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The Buying On Dips Strategy - Does It Work?

Mar. 07, 2018 1:45 AM ET5 Comments
Elliott R. Morss profile picture
Elliott R. Morss


  • Market volatility, spurred in part by uncertainties over what Trump will actually do, has increased.
  • As a result, a number of articles have been written on whether to "buy on dips."
  • This strategy, along with others are examined.

Elliott R. Morss ©All Rights Reserved


Since stock markets collapsed in 2008, there has been a spate of articles on whether to buy on dips. Anecdotal stories abound. I have a friend who claims he sold near the bottom in 2009 and bought similar equities shortly thereafter. He says this gave him a nice capital loss to put against the gains he made over the next few years. Oh, did he really? And two weeks ago, many people were crowing about having just bought on dips. That was fine, until last week.

So what do we know? Since 1970 and through 2017, the compound annual growth rate of the S&P 500 was 7.6%. That suggests that whether you bought on dips or just bought randomly, you would have done well. But note, as the following chart suggests, there have been numerous “dips” and “peaks.” Which dips to buy on? Any “buying on dips” strategy worth considering must include “timing conditions.”

S&P 500: 2009 - 2016


Source: Macrotrends

Buying on Dips

Investors had a big decision to make earlier this month, after a wave of selling sparked a long-anticipated correction in U.S. stocks. Should they sit on their hands and do nothing or use the opportunity to buy the dip?

Research by Schroders has found that over the last 30 years, the U.S. market returned an average of 25% in the 12 months after drops. Sanghamitra Saha, writing for Zacks, argues you should first look at future economic prospects and if they are good, buy on dips.

D.M. Martins Research has also done research on this question. Their findings:

Buying stocks on the dip would have been a superior strategy to buying and holding the diversified stock index since 1996. Using our buy on dips strategy, the annual return over

This article was written by

Elliott R. Morss profile picture
Elliott Morss has spent most of his career teaching and working as an economic consultant to developing countries on issues of trade, finance, and environmental preservation. Dr. Morss received a B.A. from Williams College in 1960 and a Ph.D. in political economy from The Johns Hopkins University in 1963. He has taught at the University of Michigan, Harvard, Boston University, Brandeis, and most recently at the University of Palermo in Buenos Aires. For several years, he worked in the Fiscal Affairs Department of the International Monetary Fund. He later helped establish Development Alternatives, Inc. (dai.com), a firm that became the largest contractor to the U.S. foreign assistance program (AID). Since his first IMF assignment in Ghana in 1966, he has worked in 45 countries. He has been the President of the Asia-Pacific Group, a British Virgin Islands for profit company with investments in Cambodia, China, and Myanmar. With Dr. Zhu Jia-Ming, he established Green China, an American NGO with the mission to increase the dialogue in China on the trade-offs between economic growth and environmental preservation. Dr. Morss has co-authored six books and published more than 50 articles in professional journals. He is currently available for consulting assignments.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (5)

Briar profile picture
I remember someone asking Buffett if he had a formula. He replied that he would love to have one but had never found one that worked. That was 30years ago. I strongly suspect he still hasn’t found one.

Buying on the dip is a form of anchoring to the market and price. If you don’t have an idea what something is worth, a dip won’t rescue you. It is a lazy person’s way to loose money.

The wise investor will assume that the efficient market reflects what is known, and that one should accept that until they have solid reason to know better. Why do you think Buffett has a long history of not revealing what he is doing until he has to?
Elliott R. Morss profile picture
I start from the efficient market assumption, both because it is probably the best starting point and because it keeps me humble.

I marvel at how Peter Lynch and Validea (and Tiger Woods) have been able to do so well for so long http://bit.ly/29GceLl.
Briar profile picture
Elliott, you are quite right to base your humbleness on the EMH, properly understood. When we digress from it without having done our homework we rely on luck.
KYSANMAN profile picture
Interesting points. Could this be called "Momentum investing"? Years ago I tried that strategy with hot IBD stocks and a professional investor. Gave him two years and his returns were mediocre.
I try to use a combination of technical and fundamental screens, but rely mostly on fundamentals. It is working for now. A lot better with Trump than Obama or Bush, or even Clinton. Investing is hard and requires courage, study and intuition. Luck beats them all sometimes, in the short term.
You may think it the route to follow until you run out of money.
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