I have said it many times that I love buying companies with bad press but a great business. This is a form of short term contrarian investing that has yielded some great returns for me. Because I have touted this strategy on the internet it seems like every time a company gets hit with bad press people run to me asking if they should buy that company. I think it is awesome that they are watching the market that actively but there are some things you have to take into consideration when you are buying the dip. Here are two quick strategies that will help you safely buy the dip
Buy in, gradually
When you hear a company getting slammed you never know how far it can go. You also never know how soon it will return back to the previous market price. You don’t want to buy at what you thought was the bottom only to have it fall further, you also don’t want to not buy thinking it has further to fall and miss out on an opportunity.
A good idea is to average into the dip. Buy a little and then wait and buy some more and wait. Don’t go all in on a dip unless you have factored in the possibility that you might lose 10% more if it continues to fall. This is something like dollar cost averaging but short term. This will help you average your cost basis so that if it does continue to fall you can buy more shares as it goes lower. This way you average out your basis so that when the stock does return you make your return more profitable because. Its no fun to buy a dip and lose 10% then have to make all your money back just to get back to even. It is always better to get back to even while also having money at the new cost basis that is a profitable trade.
When you are chasing a dip you need to put a system in place to buy and then buy and then buy. Going all in could be devastating because sometimes they never come back (see Twitter). You have to have more money on the sidelines as more news comes out. Often times there will be firings or store closures or just more evidence coming to light. You want to make sure that you have the money to determine what to do when that happens.
Buy when it’s low but rising
We have all heard of buy low sell high. When stocks get bad press people want to jump in because this is a low opportunity. The problem is that if you buy low and the stock goes lower you actually bought high. A way to get around this is to buy when the stock is low, but rising. When stocks fall they tend to come back but they don’t just bounce back as fast as they fell. This gives you some time to watch, read, learn, and determine if the recovery is the real deal.
The stock could have fallen 20% and then it could fall another 15% then a weak later it will start rising and coming back to normal. You want to be the person that waits for a showing of strength in the midst of the weakness which is a strong buy signal and a showing that its all clear. You might not make AS MUCH profit as if you bought the bottom but bottom fishing just isn’t very advisable. The only time you know that there is a bottom is when the stock starts rising just like the only time you know the market is at the top is when the stock starts falling. Nobody knows when that is going to happen but you CAN be ready so that when you see it you can pounce.
For a while I had gotten away from buying the bad news because the investment club requires that I become more risk adverse to protect our principal. However, I want to get back in to it. I have missed out on opportunities in Experian, Wells Fargo, and now what looks like GE which is down 27% over the last quarter, just announced a cut in their dividend and is selling well below the 30d moving average. There is some risk there but there is also a ton of opportunity. All of this information just lets me know I need to do some reading and investigating.
Its not enough to see a stock get hit and buy. You have to research and strategize. Throwing good money after bad news without doing any homework and without putting a strategy in place is gambling, it’s not investing. I have never met a rich trader/gambler but I know a ton of rich investors. If you want to invest with a great group of people email email@example.com and join our 200 member investment club. We are doing great things and we want you to be a part of it.
Be great, invest well,