Before picking up a little on 22 August, the FTSE 100 had fallen for seven trading days in a row. It’s now down 10% from its 52-week high in February. So should we buy the dip?
My answer is a resounding yes. But I think I owe folks a bit more than that.
First, I wouldn’t buy anything only because it’s fallen. If shares are cheaper than a week ago, or six months ago, they could still be too expensive.
It’s all about share value for me. And if something was already good value, it’s usually better value in a dip.
Here be charts
People often talk about buying the dip when they engage in technical analysis (or TA for short).
TA uses the belief that we can decide whether to buy or sell based on patterns we think we see in share price charts. Not valuations, just the patterns.
If people think they can divine the future of stock prices by scrutinising chart shapes, all power to them. But I’ll have nothing to do with it.
Contradiction
The idea that we should buy the dip also directly contradicts another old investing maxim, that we shouldn’t catch falling knives.
So how do we tell which is which, a dip or a knife? Well, we just wait another year and use hindsight, see?
OK, seriously, we should never use rules of thumb like this blindly. No, for me, it’s all about whether we see good value in the investment we’re watching anyway.
It’s valuation
So if I think the stock market, or an individual stock, is undervalued, then I reckon it’s even better to buy on the dips. And if something I think is overvalued falls, quick, get out of the way of that knife.
What I’m trying to say in my roundabout way is that I think a lot of FTSE 100 stocks are screaming cheap. And they just got screaming cheaper.
Let’s look at a few individual dips. Or knives.
Dips and knives
Lloyds Banking Group shares have been sliding since February, to just 42p. That’s a forecast price-to-earnings (P/E) ratio of six, and a 6% dividend yield.
I see short-term risk, but long-term cheap. In my book, it’s a dip to buy.
Then tiny AI hopeful RC365 Holding has seen its shares lose 70% of their value in a few weeks. It’s still up hugely in 12 months, though.
I reckon it’s overhyped and undervalued. A falling knife maybe.
Not so clear?
And then there’s Ocado, dropping since late July. But I’ve never been able to decide if it offers long-term value or not. So the safe side is what I’ll err on, and I’ll avoid it.
Ehether the stock market as a whole looks undervalued, or overvalued, I think there will always be dippy buys and cutty knives to deal with.
Deeply dippy
Right now though, with the FTSE 100 barely above 7,200 points (at the time of writing), I think there are far more dips to buy than knives to dodge.
