In recent years, the strategy of buying the dip worked very well for equity investors. Investors only needed to focus on buying whatever had fallen a lot. The markets always rallied over time and handsomely rewarded dip-buying investors. The entire post-COVID rally in Indian equities worked this way and every market segment played to this pattern.
The natural investor tendency is to place excessive faith in recent trends. This blind faith is leading investors to buy themes that are correcting after peaking out. Can buying the dip in thematic investing work when there is a directional reversal in the megatrend itself? Investors who buy such themes in reversal mode risk losing far more money on the way down.
One must actually avoid themes which have peaked out and cyclically reversed. But we see investors buying the dip in the hope that they can play the rally. The problem is there will never be a sustained rally in many cyclically reversing themes. Investors are blind to the cyclical nature of themes and the reversal of cycles. This is leading to a sustained misallocation of capital into several themes. Further, when money chases dips in the wrong places, it distorts valuations. Often, price performance shows up in businesses that have diverged from fundamentals.
Investors seem to be oblivious to this grave error of judgement. SIPs are flowing towards the themes most vulnerable to trend reversal. This has happened in past cycles. Given the scale at which we are investing in the wrong places, the extent of damage in this cycle will likely be higher. Liquidity is playing a perverse part and sustaining higher valuations. When the music stops, this game could end badly as the valuations head in for a sharp sudden reset. The recovery from such a valuation slump could even take years.
Investors must now avert getting trapped in the wrong themes and direct fresh monies away from frothy parts of the market. This will save portfolios from higher drawdowns. It will also provide scope for scaling up in the right parts of the market when valuations moderate. Blindly buying the dip will exhaust your money at the wrong prices well before it is the right time to tank up on equities. This is reason enough to avoid blindly buying the dip right now.