by | Jul 8, 2022 | Definitions

There has been a simple adage in stock market trading for a long time: “buy low, sell high.” Those four words have caused a lot of people to think that playing the market is easy–despite lots of evidence that it actually might not be the best strategy.

In today’s retail investing world, where millions of people have a smartphone app that’s capable of day trading, a new meme has emerged and is here to stay: “buy the dip.” 

Sometimes, it is even lengthened to “buy the dip, sell the rip” which is essentially just piggy-backing on the same advice people have used for decades. It’s not often you take investment advice from Reddit but can the buy the dip meme be a legitimate strategy?

No, we’re not going to list the funniest ten memes–there are too many to choose from–but let’s dig a little deeper into what it means to buy the dip, and whether or not you should be attempting to do so.

What Does the “Buy the Dip” Meme Mean?

The phrase essentially means that when the market takes a downturn, it’s a good time to buy stocks since they will likely rebound relatively quickly and you can make a profit. The idea is that, by buying now, you are getting in at a lower price point than the stock will eventually reach.

There is some logic to this: if you think about it, most stocks do go up over time. So, if you buy when the market dips and then sell when it goes back up again, you are likely to make a profit. 

Of course, there is no guarantee of this happening–the stock market is a fickle beast, after all–and quite frankly, if it were the best advice possible, it likely wouldn’t have been turned into a meme in the first place. 

Where Does the “Buy the Dip” Meme Come From?

The actual phrase “buy the dip” has been around for decades in financial circles, routinely publicized in places like Forbes, and discussed as a legitimate strategy. It wasn’t until the rise of r/wallstreetbets in 2021 that it took off as a meme, as new casual investors flooded into Reddit to try and capitalize on the GameStop craze.

On the popular social media service, subreddits are places where like-minded individuals can congregate to discuss a certain topic. 

Wallstreetbets started way back in 2012 as a place to give newcomers a crash course in investing, track the markets, and swap stories (usually success stories at that point, though that has changed dramatically in the years since). 

Chart displaying GME stock performance in 2021 and 2022

Source: Yahoo Finance

At the start of 2021, it had around a million users, but when the $GME market was manipulated with a flood of cash (and then media) that caused its share price to rise from around $19 to nearly $380 by the end of January, the subreddit rose in popularity extremely fast. 

Today, it has more than 12 million subscribers, and has been almost completely taken over by the submission of memes; if you know the terms “diamond hands” or “to the moon”, you probably know WallStreetbets.

Who is Buying the Dip?

Generally, the meme is repeated by people who already hold a position in the stock, as they increase their position despite the price trending down. This can be for a variety of reasons, though there is some inherent incentive for them to make the dip publicly seem temporary. 

The theory behind it though is not just held by amateurs, though. A UBS Group AG surveyed more than 2,500 investors with at least $1 million in assets and found that nearly a third of them would increase their position if markets declined further, while only 20 percent would reduce their exposure. 

With numbers like that, it’s suddenly not as easy to dismiss as real advice. 

Historical Success

Despite its widespread popularity and very public success stories, there’s not a lot of data to suggest it is a strategy that the average investor should pursue. 

The theory behind it is fine, but knowing when a stock is getting close to the bottom of a price decline is a game that even the most sophisticated modeling algorithms can have difficulty with. A casual investor is gambling at that point, and there is evidence that a more methodical approach can outperform it. 

Nick Maggiulli demonstrated this for MarketWatch, by comparing two different investment strategies. In his study, sometimes buying the dip could outperform a steady influx of investment, but if it lost, it lost big.

Chart displaying the performance history of "buying the dip"

How to Buy the Dip Safely

Sometimes though, that fear of missing out (FOMO, another meme that has been attached to the retail investment world) still wins and you will want to buy a dip, believing that the stock will rise again soon. If you are going to use this strategy, there are a few guidelines that will help mitigate your risk:

  • Make sure the stock is not in freefall: This might seem like an obvious one, but if a stock has been dropping for weeks or months on end, it is likely not a good time to buy it.
  • Look at the company’s fundamentals: Just because a stock price dips does not mean that the underlying company is in trouble. Do some research to make sure you are buying into a company with healthy prospects, even if the market is temporarily down on its shares.
  • Have a selling plan in place: This may seem counterintuitive since you are buying low and presumably want to hold onto the stock for as long as possible. However, having a selling plan in place will help you avoid getting emotionally attached to the stock and making irrational decisions.

If you still aren’t comfortable buying the dip, or you’re unsure about the fundamentals of a particular company, it might be best to stay away. A stock market is a volatile place, and there are no guarantees–even if you follow all of these guidelines.

Final Thoughts

As much as your uncle might tell you about your cousin’s college roommate that made out like a bandit on GameStop and is the next Michael Burry, buying the dip isn’t a guaranteed get-rich-quick strategy. It can pay off but it can also lose an investor a lot of money. Make sure to do your homework and understand what you’re buying before jumping in.

Investing is a tricky business at the best of times, but memes like buy the dip make it all sound so simple. Just remember that if something sounds too good to be true, it probably is!

 

Nick Saraev

Nick Saraev is a technology writer with a particular interest in macroeconomics and entrepreneurship. He's been featured in publications like Popular Mechanics and Apple News.