Ask any new investor what advice he or she has gotten recently and one pearl of wisdom is sure to be "buy the dips." Well if buying dips and selling rallies is Wall Street gospel Jonathan Hoenig is a table-pounding heretic. In the latest edition of "Investing 101" the outspoken founder of CapitalistPig.com says investors are better off sticking with stocks that are working now as opposed to looking for a reversal.
“Buying the dips in general is a bad strategy because you never know when a dip is the beginning of a prolonged downward move in a stock or market.” At Hoenig’s shop he regards dips with a visceral distaste. “Stocks are like sushi. You never want a bargain and you’d rather buy it higher than buy any stock or index on a dip.”
Momentum investing or trading isn’t for everyone, but one of the notable advantages is that it dispenses with the misguided aphorisms surrounding so-called value investing. For everyone who claims to be a master of their emotions, capable of flawlessly judging value in real time, there are dozens of investors stuck with entire portfolios of losing positions. If the emotional trap in momentum investing is giving in to fear and greed the enemy of buying weakness is hubris. Once you’ve convinced yourself you see value in a stock that’s invisible to the rest of the market it’s hard to admit defeat and get out of an investment gone bad.
It comes down to individual discipline. The battle between value and momentum has been raging for as long as stocks have been traded and there isn’t statistical evidence to declare a winner. When it comes to investing style there’s only one thing we know for sure: switching styles in mid-investment is all but guaranteed to lose you money.