“Be fearful when others are greedy. Be greedy when others are fearful.”
Wise words quoted by Warren Buffett.
As the market falls, most investors let emotions takeover which leads to unwise decisions. In other words, it leads to selling when you should actually be buying.
The question is, how do you buy stocks when the market crashes?
More specifically, how do you know which stocks to buy when the market crashes?
Within the Tykr onboarding sequence (21 tips), the last tip talks about Stockpiling which is the strategy of buying more On Sale stocks as the market pulls back or crashes. Stockpiling is the investing strategy that will build your wealth the fastest. Unfortunately, Stockpiling events don’t happen often so you need to be prepared with cash on hand.
This article will provide the exact duration and steps to execute “buying into the dip.” In other words, the following information will teach you how to buy more stocks as the market drops.
If one of my stocks drops by 10% within a time duration of 7 days, this is a stockpiling alert. Keep in mind, this is an alert, not a trigger to buy. More homework is required. The following three steps will help you determine if this is indeed a stockpiling opportunity.
Step 1) Check the news to see if there is any bad press on the company. A legal issue, regulatory matter, or an emotionally charged Tweet from the CEO can cause the stock to fall. If you do see bad press, the stock should be avoided. If you don’t see bad press, then move onto Step 2.
Step 2) Check to see if a recent quarterly or annual report was released within the last 7 days. If not, then you have a stockpiling opportunity and this is a great time to buy. If a quarterly report was released, move onto step 3.
Step 3) If a quarterly report was indeed released and the EPS came in lower than expected, this is the reason for the share price falling and the stock should be avoided. For example, if fictional company ABC had an EPS estimate of 1.5 and the EPS report came in at 1.2, that’s a 20% decline which is quite significant. A report like this will trigger a selloff. However, if an EPS report comes in higher than the estimate, the share price can rise.
If an On Sale stock declines over a duration longer than 7 days, it’s wise to apply steps 1 through 3 above but keep in mind, slow declines can be bad news. A slow decline over a longer duration can mean the MOS and Score are slowly decreasing and approaching Overpriced territory. In this circumstance, it may be time to sell the stock.
The best stockpiling alerts are when the entire market pulls back abruptly. When the entire market falls, it pulls most On Sale stocks with it which is exactly what you want. The most recent example of this was Covid-19.
- Around February 14th, 2020 the S&P 500 was at $3,300.
- By February 28th, 2020 the S&P 500 went down to $2,800, a 15% decline in 2 weeks.
- By March 20th, 2020, the S&P 500 went down to $2,300, a 30% decline in 4 weeks.
- By April 14th, 2020, the S&P 500 went back up to $2,800, a 21% increase in 4 weeks.
- By August of 2020, the S&P was already at $3,400, another 21% increase in about 3 months.
In most circumstances, you will not be able to time 10% declines in the market perfectly. You should do your best to keep buying as the market is selling. Also keep in mind, you cannot time the very lowest point of the dip but if you generally follow steps 1 through 3 above and keep buying shares as the market declines, you will make great returns as the market recovers. With the example above, you had about a 4 week window in March to capitalize on the largest gains.
There are many circumstances where investors let the market fall and then they wait until it returns to the previous high to continue investing again. This is a failed opportunity. A smart investor should buy into the dip to maximize gains.
Buying stocks as the market falls is not easy at first. Everyone around you will be screaming “the sky is falling” but if you can control your emotions, use Tykr, and follow the three steps above, you can make massive returns in the stock market.