Buy The Dip . . . But Don’t Expect Instant Gratification

I track close to 7000 stocks. More than half of them have now dropped into the bear market zone and there are literally 2000 down 50% or more from their 2021 peak.

You’ve got a pretty good shot at doubling your money if you buy those stocks now and hang on until they recover all their lost ground. In the fullness of time, that’s just how market math works.

But don’t fool yourself about hitting that home run right away, or even in the coming month. It might even take years. Are you that patient?

From Amazon To The Banks

I’ve been thinking a lot about history lately as I watch stocks like PYPL, FB, NFLX and TSLA blow out. Nobody seems to want them at this price.

While they’re all still growing roughly as fast as they were six months ago, Wall Street has lost confidence in their ability to accelerate. This is effectively “as good as it gets” for the foreseeable future.

And with the Fed stepping up to fight inflation, the free money that sustained frothy valuations is going away. These companies have what it takes to grow back into their historic share prices, but that could be a multi-year process.

I don’t have a lot of faith in that healing cycle even starting for another month. There’s too much anxiety around the Fed and what higher interest rates will do to the economy and the market.

Add an increasingly precarious geopolitical environment to the mix and we need to let the storm pass before good stocks can truly get back to work. Realistically speaking, that pushes the timeline back to at least April if not the summer.

Until then, there’s no urgency to buy these wounded stocks on the dip. The odds of a rebound just aren’t high. At best, you’re locking in an entry point and then pushing “pause” for at least 60-150 days.

At worst, you’re catching a falling knife. As I mentioned, I’ve been looking at history a lot to get a sense of how long it takes before the recovery process closes the entry window.

Amazon is always instructive. It’s down 20% since November, destroying about $400 billion in shareholder capital along the way.

Twenty years ago, it plunged 35% in three months to what then looked like a tempting $64 per share. If you bought that big dip and held on, you’d be feeling extremely good today.

But those first two years were scary stuff. Amazon dropped below $7 at one point, erasing 90% of the initial investment even for people who bought the dip.

And that $64 position stayed underwater until mid-2007. You needed seven years of patience to start making money here. Why rush in?

Then there are the banks. JP Morgan was cut in half in the 2008 crash and didn’t really recover until early 2013. Bank of America needed over a decade to get back to its 2008 peak.

Citi and AIG still have a long way to go. They’ll do it . . . but there was zero urgency to buy that initial dip unless you were going to take profit after the initial bounce came and went.

Buy And Hold But Not Forever

The only stocks I’m willing to hold onto “forever” are the ones that pay a high enough dividend yield to justify their perpetual role in the portfolio. That’s usually above 8% to ensure that we stay ahead of inflation.

Today, we settle for stocks that pay 2-4% but that doesn’t imply any kind of commitment. Right now Citi pays about 3%, so the best we can really say is that it beats Treasury bonds.

As the market rotates, opportunities to lock in higher yields emerge, forcing us to dump lower-yielding positions to make room and free up capital for the swap.

Without the regular cash infusions that dividends provide, every stock becomes a pure question of confidence. You hold on until you surrender . . . or are proved right when your favorite company dazzles the world and grows into an Amazon.

The challenge of confidence is that it tends to erode over time. We all welcome concrete signs of success.

But in my experience, the best time to own a stock is when it’s visibly succeeding. For Amazon, that’s the giddy decade between 2009 and 2018, taking a break until the initial COVID surge and then capturing the secondary leap beyond $3,000.

Buying any of the dips before 2009 really didn’t provide much in the way of instant gratification. Maybe you could squeeze 50-60% out of the stock before it hit a hard wall and retreated.

You needed the discipline to sell and roll your money where it can work harder during the slow periods. How hard does it need to work?

Never forget that the S&P 500 tends to earn 8-11% a year over the long haul. That’s the table stakes on Wall Street.

If your favorite stock is in one of those accelerated success cycles and earning more than 8-11% a year, you’re winning. Buy it on a 50% dip and you’ll probably double your money before the first decade.

We’ll find out soon whether it takes a lot of recently wounded stocks months or years to get back to work. Management will play a big role.

I don’t think NFLX or FB can really recover until their leadership make hard strategic decisions. They need to cut some businesses in order to take the overall operation to the next level.

TSLA definitely needs something amazing to keep the bulls happy. This stock can’t be all about electric cars just like Amazon stopped being all about selling books.

When Jeff Bezos embraced cloud computing and streaming video and “free” subscription shipping and healthy groceries . . . he had a $1 trillion company to play with. Elon Musk has rockets and solar panels but they’re frustratingly outside the core Tesla business so far.

The faster he brings them in, the faster his stock can recover. Until that happens, we aren’t buying. We don’t see that happening before summer. No urgency.