Buying the DIP:

does it work ?

Buying the Dip, or “BTFD” (buying the f#### dip”), seemed to be the theme of the last couple of years. How efficient and or advantageous is it?

Isolating one particular event wouldn’t give us much insight as particularities of one single event certainly would skew our perception, therefore consistency in our observations should be useful.

Also, what is a dip? A drop in 0.5%? 1%? I did a little exercise and tried to find out.

 

First, we are taking a look at the average purchase price as if you bought 1 SPY ETF share for every trading day, independent of price movement. I will call it “passive” or “financial advisor special”.

I simulated “buy the dip” purchases, buying shares only when the price drop by a certain percentage.  After that, we can compare the averages and percentual differences. We are assuming successive purchases with NO dispositions.

I want to make it clear that I am aware of the several biases and flaws that this technique may create or have. For example, prices might be skewed towards the trend the instrument has (to the higher cost in the case of the “buy everyday” strategy) at the same time benefiting the “dip buying” strategy, but the opposite applies if it was trading down, so I will willfully ignore it. I am also assuming that there is no carrying costs in stand-by money to be invested and also no return generated from it.

 

Well, I did some Math. Let’s see the results:

 

2019
Method	Avg Price	Times It Happened	% Difference
Passive	291.00	–	–
-0.5% DIP	286.49	43	+1.55%
-1% DIP	281.36	15	+3.31%
-1.5% DIP	280.16	9	+3.72%

 

It seems that 2019 was the dip buyer’s year. Assuming a number close to 12 (monthly purchases) a good dip to buy would’ve been the 1% mark. We had 15 instances when this happened and if this method performed 3.31% above the SPY. (% Difference means the difference in return for the period).

 

2018
Method	Avg Price	Times It Happened	% Difference
Passive	274.34	–	–
-0.5% DIP	269.43	63	+1.79%
-1% DIP	264.12	32	+3.72%
-1.5% DIP	261.60	22	+4.64%

 

2018 seemed to be a much more tumultuous year, there were plenty of dip buying opportunities but interestingly the difference in returns did not differ much from 2019, yet still performing better than the “passive buy” approach.

 

2017
Method	Avg Price	Times It Happened	% Difference
Passive	245.00	–	–
-0.5% DIP	240.04	14	+2.03%
-1% DIP	239.10	4	+2.41%
-1.5% DIP	239.46	2	+2.26%

 

2017 was remarkably quiet. However, “Buy the dip®” it still performed better than expected, especially considering the smaller number of dips.

 

So, what now? What do I do with this information?

Considering that marker conditions are always evolving, it is wise to have caution while looking for an approach. This strategy seemed to have worked fine for the last 3 years but we are also in a perma-bull® market for the last 3 years, this doesn’t guarantee it will keep happening in the future but give us a clear mathematical view of what buying the dip® has done in the past. (even with a non-perfect model)

How has it done so far in 2020?

I knew you would ask. Here are the numbers for January and first week of February.

 

2020 (*so far)
Method	Avg Price	Times It Happened	% Difference
Passive	327.64	–	–
-0.5% DIP	325.72	5	+0.59%
-1% DIP	322.62	2	+1.53%
-1.5% DIP	322.62	2	+1.53%

 

I should open a hedge fund…