Picking Up Dips
Vol #88: July 8th, 2022
The greatest traders develop a mystique and lore about their craft. Feats of PnL and production become legendary, and aspiring young masters of the universe discuss these like fourth quarter buzzer beaters.
My first job in the financial industry was at a hedge fund run by one of these larger than life figures - Paul Tudor Jones. We were five lowly interns in the far back office scrubbing data to feed the models for scenario forecasting. Every day it seemed there was a new and juicy morsel about the life and feats of our boss's boss’s boss.
PTJ lived up to the legend. In between hunting trips to Kenya, or hosting the Robin Hood Foundation gala with his Australian supermodel wife, we could catch a glimpse of his bright orange polo shirt sauntering across the trading floor.
His most famous trade, the one that put him on the map, was shorting the market into Black Monday of 1987. He netted $100M in a few days, and moved on to manage several billion in his fund, producing year after year of market-beating returns.
The way that we remember this trade is that he sold the top, and rode it all the way down before picking up the shattered pieces of the market and laughing all the way to the bank. Between mouthfuls of sandwiches from the Firehouse Deli (Bull Gravano on a wedge), every one of us was trying to figure out how to pull this kind of trade off.
The reality is significantly less glamorous. When we got to spend a few days on the trading floor, Paul and his wingmen explained to us how they think about position management. He didn’t short the top with a massive order all at once, but when he saw the setup, he gingerly started stepping in and set tight risk limits.
Seeing that the 1987 bull run was overheating the market, he put on dozens of small shorts that were stopped out for small losses. But when things started to crumble, he piled in with conviction.
Most investors are thinking about the opposite problem these days. Everyone wants to be the dip buyer that bottom ticks the market. Picking up even the smallest dips was an incredibly rewarding strategy from 2016 through 2021.
It’s nearly impossible to time this perfectly though. Even the best traders don’t have that level of prescience, and we’re far better off slowly chipping away towards our underlying convictions.
While we want to believe there is some magic behind the process, in good news for the average investor, the hardest part is deciding you want to start, and sticking to the course.
The past six months have been the worst start to a calendar year since 1970, and we’ve regularly seen 2% or more moves in the broad indices. That *feels* like there should be opportunities to time the market and get in when it’s cheaper.
But whether you buy a little bit of stock every day, every week, or every month, the outcome was nearly identical.
Assuming an investor is looking to max out their 401k, they’d have about $20k to invest over the course of the year. This comes out to about $80 a day, $400 a week, and just under $1700 a month.
The table below assumes you start with 100 shares of SPY, and pick up (fractions of) shares at the prescribed intervals. On the open of January 3rd you’d have had a balance of $47,630, and you’d have invested just under $10k by the end of June.
Now, given how the market has gone down nearly 20% during this time period, you’re still underwater even after diligently investing your earnings. But the difference between the strategies is very marginal.
You don’t have to be looking at the market every day, or even opening your brokerage account once a week to be effectively buying the dips. If there are any incremental transaction costs, there’s even more reason to avoid frequent trading. Time and sanity count here too - it’s not just commissions.
Things get even murkier if you start tweaking the assumptions of when to buy weekly or monthly. The above assumes you buy on Fridays, and the last day of the month.
If instead of buying on Fridays for your weekly interval, you choose another day, your fortunes are slightly different. This year Friday has been the second worst day of the week to buy.
While nothing here is ever investment advice, I certainly wouldn't look at this chart and infer that we should avoid the market on Mondays. (Other than the enjoyment of a nice long weekend.) If tweaking assumptions slightly creates unexplainable randomness, you’re probably observing more noise than signal.
Rebalance timing luck is a very real factor in the markets. Whether you buy on a Monday or a Friday is probably more a function of when your paycheck comes in than any systematic strategy.
With the market rebounding slightly off the lows, it may feel like you’ve missed the bottom. On June 17th you could have bought the low of the day/month/year at $362.17. If with perfect omniscience you’d saved your $9300 of daily buys until then, you’d have $48,324. Impossible correctness only puts you 3% better off today, which becomes a rounding error in the long run.
Whether you’re one of the greatest traders of all time, or a humble 401(k) saver like most of us, the key is persistence and stepping in slowly. Don’t sweat the fact that you’re not looking at your account every day and picking up every dip. All that scrambling to bottom tick the market, is just making your broker happy.