Why Smart Investors Don’t Wait for Bargains

Among investing's biggest cliches is "Buy low, sell high." And it's a cliche for a reason: Its simplicity makes it appear to be an obvious truth.

Don't you fall for it. In this segment of the Rule Breaker Investing podcast -- another in his "Great Quotes" series -- host David Gardner offers up an equally succinct aphorism all his own that flips that old chestnut upside down: "Dips buy on dips."

But he does recognize that this view may require a bit of explanation. So allow him to go into detail about the downsides of waiting to buy the stocks you want to own until they go on the discount rack, as well as the risks of only adding to your portfolio the ones that do.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on June 12, 2019.

David Gardner: Great Quotation No. 3. This will be the fourth time in 10 volumes that I've included myself in one of the quotes. I'm not trying to suggest this is a great quote. In fact, I don't think this is a particularly great quote. But it is a platform for me to talk about how to invest better. Here's the quote, Great Quote No. 3:

"Dips buy on dips."

I'm not going to say you are a dip if you bought on a dip. But I will say, it's pretty dippy to base your investment process and strategy around waiting for stocks to drop and then deciding to buy them. I think there's a psychological safety to that. You think: "Well, it was at $60 a couple of weeks ago. Now it's at $52. That feels better." The problem is, some of the great stocks, some of the great Rule Breakers, don't really dip that much. People who are waiting for dips end up looking pretty dippy when stocks don't dip.

I was reminded of this; I first wrote about this more than a decade ago. I'm going to share part of that essay right now, just to lay down some more dippy language around this to support my radical contention that dips buy on dips. I'm sorry, if you are somebody who buys on dips, that you might feel personally insulted by this. This will only be brief, then we'll forget and be best friends again. Here's how that essay, some years ago, started. It said:

Dear fellow Fools, do you buy on dips? Many investors do, but let me explain why I don't. For starters, some of our stocks never really dip, or at least not for long. If you follow the logic, you're going to see that these are often our best performers, because after all, they never dipped, right? Which means that if you're sitting back waiting for the dip, you're going to miss the sizzle. I prefer sizzle to dip.

That essay continued,

Look at our three best Rule Breaker picks so far this year. Of the three, two have dipped, but only briefly, and only from well higher than where they were picked. One stock went from $90 to $80 in a two-week period in July. Another fell from $60 to $52 for a few days in early November. So if you're a dippy investor, I won't call you a dip, looking to dip your way into the Rule Breakers scorecard, you may not have bought our three best picks this year unless you were particularly lucky or adept, acting in a narrow window of a week or two.

Let me say that again. If you insisted on buying on dips, you very likely didn't buy any of our three best stocks this year. Even if you did buy that first stock at $80 when it dipped from $90, guess what? Our cost basis was $60 anyway, meaning it was already up 33% once you'd perfectly timed your dip. In the meantime, that stock that dipped from $60 to $52, when you snapped it up right there at $52, our costs basis was $31 for that stock. Again, it was still up to 67% from what we'd first paid for it when you perfectly timed your dip, you dip.

I'm sorry, did I just call you a dip? I apologize!

By contrast, our three worst selections that year offered investors numerous dips on their ways to 30% to 40% declines. Thus, the dippy investor who looks for dips as precursors to buying has now established positions, perhaps multiple positions, in our three worst-performing stocks.

This is how sometimes, people join Rule Breakers or Stock Advisor with their wonderful winning scorecards, but they wind up losing money and then canceling their memberships. "It's not for me," they say, after missing all the winners and buying all the losers. Dips!

OK, I'll stop. But let me close with a solution. How do I suggest approaching Rule Breakers, or even just investing in general? Make a commitment to the companies that you want to own, not the stocks that you're going to buy on dips. Be an investor, not a share-price guesser. Once you've committed to plunking down an investment in any of our stocks, buy it all right then, which is what I usually do; or, if you like, buy in thirds.

But if you're going to buy in thirds -- where you divide up your money into three thirds, and with one of those thirds, you put it in now, and the others down the line -- if you're going to buy in thirds, please do it based on time, not share price moves. Tell yourself: "I'm going to establish a full position in this stock over, let's say, the next quarter. I'll buy on the 15th of each of the next three months." If you want to own many of our best stocks, this is the surest way. You're going to end up an Intuitive Surgical investor instead of just a dippy Intuitive Surgical watcher.

I realize it's an extreme position. I don't like to call my fellow Fools dips, but I do think it's pretty dippy behavior. Part of why The Motley Fool exists is to challenge the conventional wisdom. I think there is conventional wisdom out there that the proper way to time your way into a stock or the market is to wait for a dip. But in a world in which the market typically rises on average around 10% a year and doubles every seven years or so, and that's just the market averages, it doesn't make a lot of sense to me to be sitting there, being the person waiting for the dip.