Buy the dip! Or, don’t.
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
‘Buy the Dip’, aside from being a great name for a blog, is one of only a handful of investment strategies to have earned a three (or sometimes four) letter acronym.
This chart from JP Morgan Asset Management isn’t exactly titled BTFD, but it does remind us that when the S&P 500 has just lost a cool quarter in value, the most successful thing to do has usually been to lean in rather than bail out.
In their words:
While some periods have seen further losses, history suggests that it is much more common for stocks to rebound after drawdowns of such magnitude.
Doubling-down on a winning trade that is suffering a temporary set-back sounds like great advice. Sure, it works, just as long as you somehow know 1) that the set-back is temporary, and; 2) the trade will be winning.
As we’ve discussed, most stocks ultimately lose investors’ money. As such, buying on weakness is far from foolproof at the individual firm level. But at a market level? How have things panned out for those stock markets that haven’t turned out to be the world’s most successful (so far)?
Answering this question is not exactly trivial, especially if you, like us, are unwilling to commit more than a morning to the data work.
So here’s what we did. We looked at MSCI US dollar country total return indices going back only to 2000. We took month-end readings, and looked at how investors would fare in the twelve months following a drawdown that was at least 25 per cent from the previous peak.
For example, when we look at how US dollar investors fared in Greece, we’ll only be looking at the 12mth periods after September 2001 and September 2008. All the other 25 per cent drawdowns aren’t from a true peak so we just ignored them.
It turns out that the heuristic’s efficacy is… variable?
If you’re a habitual investor in Indonesian, Chilean, Singaporean, Saudi, South African, Taiwanese or US equity markets, you’d be forgiven for knowing that BTFD is a watertight strategy for printing money.
But if you’d bought the dip each time a 25 per cent decline happened in the Brazilian, Italian, Hong Kong, Argentinian or Russian markets, you’d likely be cursing yourself.
And, of course, some markets are a bit more mixed. Here’s the record for Chinese, Europe ex-UK, UK and Japanese markets:
So not exactly a universal heuristic.
We thought we’d let you have a look at all of the data by start date, because it’s pretty and fun.
We love heuristics. Especially ones that test well. They make our lives easier, and should not be knocked. But as xkcd reminds us:
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