The Buy The Dip Fallacy

Hey Jesspeculators

Cryptocurrency and the evolution of trading apps like Robinhood have allowed the average retail investor to jump into the market with little or no friction and even better with minimal amounts of capital. These micro trades should, in theory, allow markets to operate more efficiently as money is diluted across more hands.

The concept of trading is still very new to most of us, but what my concern is the growing trend for misinformation and biases that are going to hurt a lot of investors going forward. If you're getting your investor advice from YouTube, Telegram chats, discords or signal trading apps that are free, then you could be making money sometime.

The problem with this is that you are a downstream investor, the only reason you're getting this information and signals is that someone with more significant positions has already going to front-run you and while they are safe you need to hope there is a greater fool than you downstream to pick up the asset at a higher valuation.

Buy the dip

In a world where pension funds are so desperate for yield that they have such a high allocation to equities to get there 7 - 7.5 return there's a massive moral hazard to whats going on in the stock markets. Central banks cannot allow pensions to go bust and are securing a floor for stocks with money printing to smooth out dips.

Traders realise this, and they know there will be a dip and recover and are actively riding these waves, but they are not built on fundamentals only on momentum of cash flow.

The theory of buying the dip has become louder and louder, and with a fed put on the stock market, you simply cannot lose when buying the dip. The stock market has been in a bull run for ten years now and buying the dip has been profitable in this artificial market, heck it been profitable for 40 years now, since we have fiat decoupled from anything.

The stock market has been actively managed by central banks and governments to reward a certain class of people, asset holders systematically. It didn't matter if you a poor capital allocator or not, you would always win in this market.

If you look at down days of hedge funds before and after 1971, you can see once we hit a fiat standard, these investment firms could do no wrong. Are they geniuses? Are they psychic? No, they are actively being supported by money printing as central banks have been reactive to the slightest market stress.

Buy the dip actually doesn't work in real markets

If we take a look at this study by Artemis capital over a 90 year period we can see that if you bought the dip before central bank fiat money that strategy goes bankrupt three times. I'm not talking minor drawdowns I'm talking flat out lose all your money or at minimum 90% of what you had invested.

We live in a quantitive easing era, and since we humans have a recency bias, we take this as the norm when in fact it's artificial. It's the use of inflation and currency debasement to transfer wealth into equity markets.

This is a clear illustration that we do not have free markets, anyone who thinks that I am open to hearing the counter-argument but it's hard to see where this market is free. If you're not free to lose all your capital as well as earn, then what kind of market is that?

US Equiteis - 1928 - 2019

Buying the dip continues to reward malinvestment

There is a fantastic comment by Harley Basssman that sums up this phenomenon and its:

"Pigs can fly if shot out of a large enough cannon, but they eventually return to Earth as bacon."

What is happening is we're counting to pore capital into a market of diminishing returns, and it's going to take more and more debt to keep this Ponzi scheme going. It's not going to stop so any dips you buy will be paid for with future currency debasement.

Playing in the equity market is a no brainer, you don't fight central banks, you front-run them, and that's the moral hazard we live with today and why the stock market does not reflect the true nature of the world.

If we do eventually see the reversal happen, I wouldn't be surprised to see 90% drawdown in equity prices and wit it 60 to 70% in home prices. So they will do any and everything to stave that off as long as possible.

That's why I've decided to not play in the stock market and buy my BTC and HODL on as I watch this entire thing eat itself.

Have your say

What do you good people of HIVE think?

So have at it my Jessies! If you don't have something to comment, comment "I am a Jessie."

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