A fallacy is the use of invalid or otherwise faulty reasoning in the construction of an argument which may appear to be a well-reasoned argument if unnoticed. (Wikipedia) I’ve never understood the logic of buying the dip or averaging into a position. Why buy something, then hope the price goes lower so you can buy more cheaper? Why not just wait and buy cheaper?
Yeah, sure, we can’t know when the price will bottom, but does that really matter? As you all know, oil and gas companies were hammered in 2020, with oil even going to -$40 one day as a contract rolled over. Obviously, that was the low for oil, but if you had bought a long ETF with oil at $17, which made complete sense, then you took an almost total loss on that single day as many of the ETFs ‘broke’ and then changed the way they were calculated. Recovering your loss was nearly impossible.
I remember reading an article on Antero Resources saying it was a ‘generational opportunity’. On Jul. 31, 2019, there was an article on Seeking Alpha saying “Antero Resources (NYSE:AR) has a strong case for being the most undervalued energy equity today.” With the price down from a high of $68 in 2014 to $4.65, it certainly could be a bargain, except that late June to early July it was $5.20. The price was down 10% from being cheap. What would it be in a month? And remember that in June 2014, oil was above $100 and natural gas was around $4.50. Antero shares headed south in July 2014 along with oil and NG. In July 2019, NG hit $2.11 and oil was $55-60. It’s no wonder the share price of AR and other producers were also down significantly.
On August 27, less than 4 weeks later, it hit a low of 2.78, a drop of 40%! A mere 5 days later, the downward trendline was broken, so then it made sense to consider buying.
On September 16, it hit 4.38 (+57.6% from the August 27 low, 2.78). Since it was back to the upper trendline, best to sell and lock in the gain. Once it broke the lower trendline, you really must sell. The SA author was already long when the article was published on July 31, so at best his first buy was around 5.60, but he may have bought in May or April, buying the ‘dips’ for a long term hold at ‘bargain’ prices. Perhaps he took a trade late August through September for 57%, but I doubt it, since that’s not his strategy. On November 21, it was down to 1.86. Buy more!!
I’m sure your financial advisor doesn’t look like this guy, and he may be super friendly and supportive in his approach, but he might also be giving you the same advice. Seven months later, in February, 2020, with the price back under $2, this author remained committed, saying, “I would argue as a bullish investor, that everything we wanted to happen in a long-term best case scenario is actually happening, albeit with some short-term unexpected pain.”. And on April 1, it hit a low of 66 cents and it was no April Fool’s joke! That’s some serious pain for nearly a year when acting on trendlines could have avoided all the pain.
Since it resumed falling in February, it would have been wise to keep watching and waiting for a bottom to form or the falling trendline to be broken. Not to be the Fool, it was a great buy in early April to more than double your money in a few weeks and bag 4x your money in a month. For those who followed the author’s advice nearly a year ago, you were still underwater on shares you bought at $4.65. The author, who wrote his first article on AR in Dec. 2018, bought shares then around $10! And bought the dips down to 66 cents!!! And still ‘cheerfully’ wrote, “everything we wanted to happen in a long-term best case scenario is actually happening”.
From April Fool’s day forward, AR finally looked interesting, and with over 4x your money as a reward for waiting patiently, you were then able to trade comfortably with house money. In July, 2020, over a year and a half from his first article suggesting to buy AR, this author was now saying “Antero Resources Is A Generational Buy”. And he would later be proven ‘correct’ as it powered up to a high of 48.80 June 8, 2022. My first buy was July 1, 2020 at 2.61 since I wasn’t watching it closely and hadn’t been setting alerts to let me know when it finally bottomed. Sure, it was disappointing to miss buying at 80 cents, but I was thankful I hadn’t bought the dips.
Now, the author, and others supporting the buy the dip argument, will confidently say the method was a success and they were completely correct in their analysis. I say that’s ridiculous! He first bought at $10 and held it all the way down to 66 cents!
Last year was a banner year for natural gas, which is also why AR rallied so high. After falling 50% from the $10 high, it may have seemed cheap at $5. Greg, the NG ‘expert’ on our SA group, has made millions trading NG and did especially well in 2022. His strategy is to build a position as it falls in price and on Dec. 28, with NG dropping hard from 5.18 to 4.70, he wrote, “I bought 10K BOIL at 18.50, it's possible NG could drop to 4, but since I have no idea when it will flip higher, I'm going to start buying the dip! Since I'm building another large position, I wouldn't mind if BOIL drops to 16, so I can add more as it drops.” To my mind, that’s madness and buying the first day of a large drop is rarely a good idea and can’t possibly be called a ‘dip’.
In hindsight, we can see that NG made lower lows almost daily and at most within 3 days. On Dec. 30, he bought another 10k at 17.51 and I asked him about buying KOLD instead. He replied, “I'm not interested in KOLD anymore, my focus has switched to building a large position in BOIL for another 500k plus gain.”
To start the year, he added 10k at 15.10, 14.17, 14.05, 13.40, 12.75, 11.83 from Jan. 3 - 6. That’s not buying the dips, that’s jumping in the middle of an avalanche! He disagreed with my analogy and remained confident in his strategy. It’s really amazing how really successful investors remain convinced in the validity of ‘buy the dip’. I still say it’s a fallacy and they are successful despite following a defective strategy.
It’s also interesting that he often added the first day when it broke lower. He did that first at 18.50, again on Jan. 3, 5, 25, 26, then 3x10k on Feb. 1 at 6.84, 6.36, and 5.70. Continually, buying the avalanche, not the dip. A mere 3 days later at the low of 5.55, he was now down 51.7%, -$891k. Not a big deal since he closed his KOLD position on Dec. 22 for a gain of $796k (+40.8%). But, he could have kept his KOLD position for a gain just shy of $6.5M. And remember what he said on Dec. 30, “I'm not interested in KOLD anymore, my focus has switched to building a large position in BOIL for another 500k plus gain.” He won’t ever change his mind. Hopefully some of the people who read this article will change theirs.
Feb. 3 proved to be the avalanche low as it made a higher low three days later. Now it was finally reasonable to buy, but when it broke the lower trendline on Thursday, Feb. 16, get out if you had bought or re-bought after selling higher. Continuing his strategy, Greg bought 20k on Friday, Feb. 17 at 5.20, the first day it broke sharply lower. That’s like buying property at a ‘discount’ after a second earthquake. Sure enough, on Tuesday, Feb. 21, after holiday Monday, BOIL sank to a low of 4.34 and closed 4.41. He was now down over a million dollars. Imagine if he had stuck with KOLD for the full avalanche! He would have had a gain of nearly $8M, +484%!
The next day, Feb. 22, BOIL opened at 4.71, hit 4.63 and turned up. Buying at the open with a stop had you safely on board for a rocket ride up to 7.86 on Friday, March 3. Taking the quick gain of 67% was clearly the best decision, regardless of which way it opened after the weekend. Greg commented that I should have loaded up on KOLD if I was so sure that NG would go lower. I was content to be safely on the sidelines after selling BOIL at 7.80. As it turned out, I should have taken his advice as KOLD opened 21.7% higher with NG down from 3.02 to 2.63. I was still content with my view from the sidelines and a chance to re-buy BOIL at 5.85, 25% lower than I sold on Friday. At 2pm, it made a sharp reversal from 5.64, so buy with a stop sell. This may actually be a ‘gift’ from Friday’s high, so with the price pushing up, this is a ‘dip’ that makes sense to buy. On Mar. 8, it fell sharply from the open of 6.11, so sell on a stop at 6.00, lock in your gain and watch the potential third serious avalanche / earthquake from the sidelines.
I bought the dip on Wednesday, March 15, watched it closely after the report on Thursday and decided to play it safe and sell out late in the day. After all, it was again gapping lower so why take the risk? If you did hold, you needed to sell on Friday and take the small loss.
Hopefully, I’ve convinced you that buying the dip as a stock is falling overall is a crazy strategy. A better strategy is to hang on to your cash and wait patiently for the bottom to finally come. You’ve also seen how fast the price can rip higher and it’s great to be watching closely and catch them, but if you miss it, like I did with AR, there’s still lots of time to get in for the longer move up. Natural gas won’t stay at these low prices forever, since they’re below breakeven for most producers. Both AR and NG will eventually move up from current lows and hopefully you will avoid buying the dip and enjoy the rip.
PS. IAU might be ready to rip, if gold continues to trend upward.
Update to Fri. March 31 : IAU had indeed already put in its low on Fri. March 17, but you had a chance to buy the following week after reading this article. AR hit its low on March 23, and the next day gave an ‘easy’ opportunity to jump on board and be sitting on a cushion by the end of the day.
Gold has continued to range from 1960 to 2020, but IAU and other miners did start a move up. They may have now stalled and will pullback with a drop in gold, so I’ve taken gains and am trading the range. With IAU, I bought a lot extra on the early March dip since the drop was based on a news event that had no bearing on the current and future operations. It was a good example of when it makes sense to buy the dip, especially when a trusted expert supports your own conclusion. Given that it may pullback to C$3, I have sold half of what I bought at 2.80s for a quick gain of 15%.
Antero, which also started an up move, is still within the down trend range. NG has continued to fall, but may have bottomed. Next week is fairly critical.
NG is definitely ‘under priced’, since it is below production cost for most companies, but it could go lower so caution is still advised. If you’re interested in this roller coaster, best to read my ongoing article on Trading natural gas in 2023.
Update to Thurs. April 6 : Happy Easter! This past week, gold moved back up and NG moved back down. IAU is banging its head on a hard ceiling of $C3.43. It may be tempting to take the 20% gain from buying the dip at 2.85, but that dip was actually a gift, so don’t expect to get it again. Another gold miner, CXB, made a hard 2 day drop in October, 2022 on news of sanctions that the Biden administration put on Nicarauga and their gold mining industry. Naturally, it could have been serious, but “it prohibits new US investment in these identified sectors in Nicaragua”. CXB has an existing project and I already had shares so I decided to buy more. That was a great dip to buy, yielding a return of +130% in less than 6 months.
I finally sold some shares last week, but will continue to hold for an extended move higher based on Taylor’s article early March saying it was “a dirt-cheap valuation” and Avi wrote last week that “Gold is set up to run in 2023.” To be safe, I also put in an alert and stop sell at C$1.40 (-6.7% from Friday’s closing price).
Taylor’s article today, Sunday, April 9, suggests, “Marathon Gold: Back On The Sale Rack, 2 Potential Catalysts (Rating Upgrade)”. I’ve been wondering whether it was time to buy or not, so I will buy now that Taylor has given the green light. Its low volume and erratic moves makes it difficult to trade, so I simply try to get a good price and sit on it for a good gain.
I also finally bought some DME on April 4, low/close 1.46 (-8.13%), knowing it could go lower but with it back to the 2020-21 floor price and others buying as it fell, it seemed like a reasonable bet to take. It was up the next day and I added after getting an alert. I’ll stick with a small position but it’s an interesting story. Here’s a complete write up: “Desert Mountain Energy: Profit From The Helium Crisis”
I’m still holding my Antero (AR) low buys and expect a move higher once NG finally turns up. I’m keeping a loose stop on a small position, waiting to take a big trade in BOIL.
One month later, Sunday, May 14, Happy Mother’s Day! : NG failed to hold its low and I was stopped out of AR. They may have now put in a bottom so I am trading AR and BOIL/HNU.
DME resumed falling after a hard 2-day rally and is back to its floor of C$1.40 and may break low, so remain patient with an alert set at 1.47 or so. Conversely, OUST, a lidar company, made a rip on Friday, open/low 3.95 from .84, high 4.99, close 4.94 (+28.65%). I got an alert and bought. The past 2 buys on alerts paid off well so it was an easy call.
If you think the 82% drop since February is huge, take a look at the weekly chart!
The valuations and stock prices in 2021, many for SPACs, is simply mind boggling and I simply never would have believed they could all fall so significantly. Now, it’s time to dig around the rubble and look for potential long term winners. It seems OUST has potential. A new SA article gives me some extra confidence. “The key investor takeaway is that Ouster is too cheap here as the company is now full speed ahead in the Lidar space.” I’ll be watching it closely next week.
Another stock I will watch closely is Paypal. I’ve hated their service for years, but it was the only option available for my website. After its IPO, I considered buying shares as a way to get some of my money back that I paid in excessive fees. I didn’t and the stock went from $30 to $300. Ouch!! It closed Friday at $61.69 so I’d best be ready for a second chance. You can do your own reading on Seeking Alpha to gather more info.
Update to Friday, May 26: NG and AR continue to struggle, but they hit bottom on May 4-5. I’m still trading BOIL/HNU. They both shot up at 1pm, May 12 on news of reduced rig count. It was really just an excuse for the algos to kick into gear and blast the price higher for a few days. Given that BOIL is moving nearly double in percentage terms, it makes sense to simply trade it rather than both, for now.
DME continues to slide. From my first buy April 4 at 1.48, it made a quick reversal to 1.79 in 2 days, +20.9%, then held 1.60s. Obviously, from holding flat, a stock can either go up or down, so be ready for both. In this case, it broke lower, so sell and avoid a drop of 37%, so far.
Clearly it could go lower, maybe even to 50 cents, so wait for the trend to change.
OUST on the other hand, roared up over 61% from my alert and buy on Friday, May 12. It’s also been making 20% swings, so actively trading a portion of your position makes sense. Once it settles in to a more subdued range, then you can let it ride with a stop in case it suddenly reverses.
Paypal is still searching for a bottom, so set alerts and wait patiently.
Update to Friday, June 2: NG and AR continue to struggle, with NG making a new low on Thursday, June 1. AR made a slightly lower low on May 30 from its May 4 low. Patience remains the key and it paid off very well with DME, which roared up this past week.
If you lowered your alert after Monday’s close, you would have caught the open/low of 1.01 the next day. With low volume shares like this, it’s best not to be too picky with the price. On May 31, it took 3 hours to get my buy at 1.07. Now it’s best to watch for a full pullback or a follow through higher. It could be either. This coming week should make it clear.
OUST continues to move higher, so continue to trade the range. Don’t let it get away on you to the upside or downside.