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At The Motley Fool, we like to ‘buy the dip’ whenever we can. That means picking up shares after the stock market has fallen, to gain exposure at a lower valuation than just a few days earlier.
We see it as the same principle as going shopping in the sales for, say, clothes or tech, or whatever. Who doesn’t like bagging a bargain? Yet many newbie investors looking to buy shares don’t view it like that. Some get nervous when the stock market dips, in case it heralds further trouble ahead.
I’d buy the dip after last week’s setback
Sometimes they will be right. The stock market may dip, then dip again. Nobody knows for sure what it will do next. However, I have learned that if I keep hanging on and on for the next dip, I never buy shares.
At some point, I have to take the plunge. Timing the stock market is impossible. But when I buy the dip, I am taking advantage of a move that has already happened, rather than second guessing where it goes next.
Stock markets suffered a minor setback last week. The US S&P 500 ended the week 5.15% lower. The FTSE 100 closed just 1.56% down on the week, with the FTSE 250 slipping 2.05%. That’s not a crash, just a little dip. Yet it has thrown up opportunities.
Some individual stocks have fallen by larger amounts. For example, InterContinental Hotels Group and Dechra Pharmaceuticals fell by 4.67% and 4.47% respectively on Friday. Neither are high on my shopping list, though. I’ll pass on these but others may be tempted.
I also like to take advantage of extended share price dips. For example, BT Group is down 11.49% over the last month. Fund manager Schroders has fallen 10.41%. In both cases, this is just the latest stage in a long-term share price decline.
The two stocks look cheap, trading at P/Es of 6.95 and 10.56 times earnings, respectively. I am sorely tempted by BT, but would need to take a closer look at Schroders. I would never buy a stock solely because it is cheaper.
Two falling stocks I would happily buy
Insurer Aviva has experienced a much smaller drop of 4.02% over the last month. I would consider that dip worth buying because the FTSE 100 insurer has been on my watch list for some time.
The recent Anglo American dip really tempts me. The mining giant has fallen 7.82% over the last week, as global recession fears grow. Yet its long-term share price trajectory is positive, as it has grown 106.79% over five years.
The stock looks dirt cheap, trading at just 4.5 times earnings and yielding 8.99% a year. I need to do further research, but this looks like the type of dip I could happily buy.