How We Buy On Dips

We always say, “we are buyers on dips.”

What does that mean?

Last week sprang this very question from a friend.

If we are going to talk the talk, we’d better walk the walk. We practice what we preach and here’s a little insight on how we go about it.

When markets dip, we push our chips to the center.

Some people enjoy fixing up old cars, building furniture, traveling the world, or playing sports in their free time… that’s what makes life worth living. We focus on finding great stocks. That’s our sport…our life’s work.

After spending years digging into companies, we’ve probably tried every way possible to trade stocks.

So, let’s get back to the convo from last week.

Colleague: what’s the average time between one of your calls and the juice in that name?

Luke: Great question! We’ve studied this over the years and 9 months is the sweet spot.

Colleague: …sometimes we talk and you tell me about something that is ripping and “we profiled that name 4-6 months ago. How do you go about setting your buy price and cut price?”

Luke: Yes that happens a lot…thankfully. But, there are opportunities within that stretch of time. Stocks rip and dip on their way higher. I am always interested in those dips.

Here’s what I look for when buying on dips:

  1. If the market is weak and our big money index is low, that’s when I start looking for deals. I’m hunting for prior leaders on a pullback. Just like now…
  1. Some weeks, like recently, there is very little buying. This can have boring names float to the top ranks. Examples would be Utilities and Home Builders. Those are typically not monster growth areas. But, this tells me that the names I’m looking to add are probably under pressure.
  1. I am looking for the TTD, PAYC, CMG, and LULUs of the world. The handful of names that keep showing big buying for months and months. Deals don’t come every day… patience is key. When it does come, I laser focus in on it.

There are a handful of stocks that are lights out each year. We try and make those the core themes around the research. 

I’ll say it again, be patient. Dips don’t come often in a bull market.

You always get an entry. It could take months, but there is always a sell-off of silliness to take advantage of.

As for cutting, I rarely cut stocks. Great stocks keep going over time and you never know when a company like RH or SAM is going to turn the ship around. I’ve seen it so many times.

But, when our big money index gets overbought – that’s been a great time to trim risk.

Examples of Buying The Dip

A great way to visualize this is by looking at prior options ideas. When stocks go on sale, we look for beaten down winners to play for a pop. Below are examples of bullish option plays we’ve had.

There are good bets, bad bets, winning bets, & losing bets. We win way more than we lose – more importantly, the game is won by continually placing good bets.

Facebook from late November fits the bill.

NVIDIA from late December, too.

Resmed was under a lot of pressure in February.

Bottom line: patience = opportunity.