Have investors become hard wired to buy the dip?

Henry Jennings | Marcus Today

I think Joe Walsh summed it up best in his hit song Life’s Been Good:

“I go to parties, sometimes until four
It's hard to leave when you can't find the door.”

It gets right to the crux of the market at the moment — whether that’s the US, the local market, crypto, or gold. It’s hard to leave when you can’t find the door… and life is good! And ain’t that the truth.

We’ve all been infected with this disease called FOMO. No one wants to be the one who misses out. We’ve been treated to exuberance beyond our April dreams. It’s astounding, really — if someone had said to me back in April, during Liberation Day, that the ASX would bounce back to close to 9,000 in August reporting season, I would have called them bonkers. Absolutely bonkers. Yet here we are.

And not only are we here, but we’re showing resilience to any bad news — just ignoring it completely. Any pullback is simply another opportunity to get set. We’ve become hard-wired to buy the dip.

The whole industry is geared to buy the dip. Anyone selling during these times is usually carrying the biggest leverage — the stop-loss crowd, the CFDs, or the margin calls. Who else sells? You just buy more.

It’s all about time in the market — buy the dips, full speed ahead, and damn the torpedoes. After all, there’s a whole generation — or even two, in my case — that’s never really seen the havoc and chaos of a serious pullback. Sure, we had the big one in April when the world was going to end, and much panic. Then there was COVID, of course, and more panic. But the GFC is now a distant memory. The ’87 crash — my first — is just a story told by old-timers. Us stalwarts with long, bushy beards and fading memories. It was so long ago — 38 years. That’s a lifetime in financial markets. In fact, that’s my lifetime.

We’re hard-wired. The industry is hard-wired to buy.

It’s rare that anyone says “sell.” In this FOMO-induced market, no one is shouting “sell.” There are a few voices out there, but they’re whisper-quiet. No one wants to leave the party.

Warren left the party, and now his mantle is beginning to be questioned. He’s 94, for goodness’ sake — give the man a break. One of the most successful and famed investors ever, and now some are taking issue with his caution.

Of course, during the April rout, he looked like a king. But now he’s looking a little left behind.

So why, if knowing when to sell is so important, do we — and I include myself here — focus wholly on buying? It’s not as if we have limitless resources as retail investors.

Of course, there are tax implications from trying to ‘trade’ the volatility, and sometimes it’s better just to buy and hold — but with individual stocks, that can be detrimental to your wealth.

So, are there signs that you should be cashing out? When we talk companies, there are a few red lights. The top one would be insider selling — directors cashing out, founders getting out.

Others would include:

• Guidance downgrade — may continue for a while. It can become a serial underperformer and consistently struggle.
• Competition coming.
• Boardroom eruptions and discontent — surprise resignations “for personal reasons” and/or “spending more time with family!”
• Every broker is bullish to the max — CSL is a prime example of that. No one is ever bearish despite the headwinds to its business from US tariffs and changes.
• Maybe the stock has reached your target — there’s an old maxim about leaving something for the next man (or woman).

As far as trying to time the exit from an index or theme party, here are some things that may be flashing red lights:

• Everyone’s a genius — dinner party talk (do people still have those?) revolves around the market and how much money you’re making.
• Valuations get silly — no one cares as long as they’re moving higher on momentum… until suddenly we have a Wile E. Coyote moment and discover the ground is no longer there.
• Buy every dip — regardless of the reason for the falls.
• IPO frenzy — not something we’ve really seen lately, but we have seen huge capital raises from many. Especially in anything AI!
• Market leaders narrowing — markets being driven by fewer and fewer stocks.
• Hot theme rotation — whatever’s hot drives the money: uranium, rare earths, AI, etc.
• Increased leverage — never a good thing.
• Founder and director selling — again, insiders cashing up.
• Extreme complacency — despite the most obvious risks.
• Ignoring history — and then it repeats. It’s never that different this time; we’re the same humans with the same fear and greed driving markets. It’s not valuations, but psychology!

We spend all our investor intellect on finding stocks and assets to buy. Maybe we need to ensure we spend as much effort on finding the stocks and markets to sell.

There’s a whole group known as hedge funds that spend as much time finding the underperformers as finding the outperformers. They serve a serious purpose. It is far harder to short a stock sometimes than to buy it. Shorting requires swimming against the tide. It can be lonely. It can take time. You can get seriously squeezed for many reasons. But short sellers do tend to do a lot of research before they embark on that strategy — something that buyers may not do.

When you get in that Uber and the driver gives you a hot tip, you just take it as that — a hot tip! How many times has a driver given you five reasons to sell CSL? Or CBA? That never happens.

Perhaps it should. The fine art of selling is more important than just throwing money at a bull market and thinking you are a genius. We are all geniuses, when the market is at all-time highs. It’s when things get tricky that discipline and strategy come into play.

We should all learn to sell. We have all been taught to buy. Always good to know when to leave the party. You know what — there’s always another party next week! And you are invited!

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