I often hear people talking about buying the dip.
Buying the dip just because the price drops is not a viable long term strategy. Why? The investor needs to look at both the pricing of the security in the market AND the value presented by the security. Too often, only the market side of the equation is considered.
I like to think of it this way. Suppose someone is buying apples and the price drops from 60 cents a pound to 5 cents a pound. Is it a good deal? Maybe and maybe not. If the apples are fresh, it could be a great deal. If the apples are rotten, it's a terrible deal. Assessing the quality of the apples to be purchased is similar to assessing the fundamentals of a stock.
In a market trending up, buying the dip can be effective, but sooner or later winds change and the trend reverses to a downward trend which can toy with the investor's psyche. Securities are bought on "the dip" but the dip continues down again and again. The investor starts to question their purchase decisions and often sell at a loss.
By valuing a security and assessing the security's fundamentals, the investor adds key information to the reason for holding a security. Then, comparing the "value" presented by the security to market levels, the investor obtains a clear idea of what they are getting for what they are paying.
Watch out for blindly buying on the dip, you may end up with a rotten apple and get what you paid for.
Be smart, be well-ready, be aware and be successful.
