Three Rules for Buying the Dip

Colin’s Note: In Wednesday’s video, I warned that a market correction is coming… So, today, I’m going to help you prepare for when it hits.

History has shown that when the news around the stock market is at its worst, it’s a good time to step in and buy. It’s something we always realize in retrospect… which is why I’ve learned some rules to keep in mind when a correction is coming.

So, in today’s video, I’ll share with you my three rules for buying the dip. That’s three things you can do to take advantage of a pullback in the markets.

I think we’ll likely see a correction of 5–10% over the next several weeks… And the last thing I want is for you to emerge on the other side of it having missed out on a great buying opportunity because you weren’t prepared.

So click below to access today’s video… Or read on below for the transcript, edited for flow.

And, as always, if you have any questions or comments for me or my team, you can write us at feedback@brownstoneresearch.com.

What’s going on, investors? Hopefully, you guys are doing well out there. Today, I’m piggybacking off a video I posted a couple of days ago where we talked about the charts of the S&P 500 and Nasdaq… We were looking at charts of Meta stock… and man, these stocks have started to go straight up.

What we know about stocks that start to go up very rapidly is that oftentimes gravity takes over and we have chances at pullbacks. I think over the next six to eight weeks, we’ll have pullbacks in the equity markets of 5–10%. That will create a great buying opportunity. It’s a chance to do what some people call, “Buying the dip.”

Now, before we get that opportunity, I just want to make sure we’re prepared. So today I’m going to give you the three rules around buying the dip.

This is going to help you likely over the next month or two when we finally get this pullback in the markets. If you follow these three rules, I think you’ll have much better success buying the dip in the stock market.

Rule Number 1: Have a “Why”

You should have a “why” – a very specific reason why you’re buying the stock. I think for a lot of us who are in the trenches in the stock market over the years, it’s more or less a habit to buy stocks.

Maybe we have automatic investments in a 401k or IRA… or maybe we get a payday, tax return, or something like that… and we toss a little bit of money in the stock market.

I think that’s great. I’m not telling anybody not to do that. But what I’d like you to do is take it a step further. Have a very specific “why.”

Why are you buying this stock? Why are you buying Meta stock? Why are you buying Nvidia? Why are you buying Google stock at this time?

I would have very specific targets. Maybe it’s just a retirement thing and you’re just looking to buy the stock now. Then, in 25 years, you’ll have a larger nest egg so you can retire and not have to work your whole life.

But I think even better than that is to have a hyper-specific “why” for that money. Maybe you want to buy the stock today and wait until it reaches a certain price. Then you’re going to sell it and do a home improvement project.

Or you have this stock and you’re going to watch it run up. Then you’ll sell just a portion of it to buy your son his first bicycle… or to take the family on a vacation.

You don’t have to sell all the shares. You can take a small portion and say, “When Google stock goes from $100 to $200 over the next two years, I’m going to sell this chunk. And I’m going to take my family to Hawaii.”

Have a very specific why. It’s going to laser-focus you. And it’s going to help you make better decisions. When you have very specific goals and targets, it’s often a great way to have better results.

Rule Number 2: Plan Ahead

Rule number two is to plan your buying in advance. The stock market’s ripping higher right now, everything’s all good. It’s almost like bad news just slides off the back of investors.

But when markets start to reverse, that’s when the bad news that’s happening in the Middle East gets a little bit more noticeable. You’ll also have interest rates. Also that national debt, every time I look, only seems to be going upwards. Maybe the job market weakens and people lose more jobs.

It’s an election year and I think we’re just getting started in terms of the heat, rhetoric, and back-and-forth between each party.

And when the stock market starts to reverse, that ugly news is easy to listen to and digest. So make sure you have your levels in advance.

I like to pick levels… If it’s an individual stock, say it’s at $200. I like to pinpoint a very specific level. For that $200 stock, I’ll say, “I’m going to step in here at $180.” I might not step in with all my money at $180, but I will decide on a course of action in advance.

Say I want 10 shares of the company that’s at $200. I’ll write that down along with my plan for when it pulls back to $180. I’ll buy two shares when it hits $180, and if that stock continues to move lower to $170 or $160, I’ll incrementally buy more shares.

But the most important thing was planning it out in advance. Because, as I said before, when these markets reverse – and it’s not a matter of if, it’s when – the news is going to be bad. On the mainstream news, the financial news, on Twitter, on Instagram, and on Facebook… Everywhere you look, the news is likely not going to be good.

But history has proven that when the news and the turmoil around the stock market is at its worst, that is often one of the best times to step in and buy.

You just have to have a game plan for when the bad news gets loud.

Rule Number 3: Buy in an Uptrend

Now, number three is probably the hardest thing for most investors to understand. But when you are selecting the stocks and indexes you want to buy the dip on, you are only going to buy stocks that are in an uptrend.

The simplest way I explain this to people is using a real estate example.

Let’s assume you’re a real estate investor and you don’t care about the property. You’re not going to live in it. You just want to get it for the best price, rent it out, and make some money over the long term.

You just don’t want to buy a condo for $200,000 only for it to be worth $100,000 a year later. That’s a big paper loss. And you certainly wasted money and could have done a better job both investing and timing that investment.

One way you can get better at timing your stock purchases is to only buy stocks that are in an uptrend.

Going back to the real estate example, say you examine some condos in your city. Let’s assume all these condos are the same. So the price you pay isn’t related to the amenities, the view, or anything like that. They’re all the same.

Now, let’s assume that one month, those condos are $200,000… Then the next month they’re $180,000… Then the month after that, they’re selling for $170,000.

Well, now that they’re sitting at $170,000, what gives you the confidence that that’s the bottom and next month they’re going to go up? The truth is nothing is telling you that those condos will go up in value anytime soon.

Month after month after month, buyers are stepping in at a lower price. That is the definition of a downtrend.

The start of an uptrend would be if buyers come in at $175,000 for those condos and then the next month it’s back to $180,000. That is the start of an uptrend. And that is where we are trying to buy stocks.

It doesn’t have to be the start of an uptrend. But two examples of stocks that are in opposite directions are PayPal and Nvidia.

If you just look at a chart of PayPal, it looks like the side of a mountain. The price continues to go lower and lower and lower. Anybody who has been buying the dip on PayPal over the last couple of years is underwater on their investments. And it has nothing to do with PayPal. The main reason has to do with rule number three… They didn’t wait until buyers stepped in at a higher price.

Now, contrast that with Nvidia that has simply only wanted to move higher over the past year or so. Yes, there have been moments where Nvidia has sold off tremendously. But you can see clearly defined areas where buyers have started to step in at higher prices.

Those are the moments – and these are the types of stocks – that, like that condo example, are having buyers step in at a higher price.

Until you witness buyers stepping in at higher prices, you have to assume that the chart of the stock will continue to move in the direction it has been moving in. There is truth to an old saying on Wall Street… “The trend is your friend until the bend at the end.”

Hopefully, you guys enjoyed today’s video. My name’s Colin Tedards, and we’ll be back later with more from The Bleeding Edge. Until then, good luck with your investments. Have a great weekend.