Stocks to Buy | Data Scientist: Buying stocks on dips? American data scientist has some bad news for you

Although the two investing strategies might sound the same, in reality they are two different concepts. DCA, or rupee-cost averaging in the Indian context, means investing a fixed amount at regular intervals irrespective of whether the stock prices are going up or down.

On the other hand, buy the dip, the current mantra of retail investors on Dalal Street, indicates investing only when the stock prices are going down.

At the prima facie level, it appears that buying the dip is a much smarter strategy than the boring DCA and will outperform most of the time. However, historical market data indicates otherwise.

“Buy the dip underperforms DCA in more than 70% of the 40-year periods starting from 1920 to 1980. This is true despite the fact that you know exactly when the market will hit a bottom,” says New York-based Maggiulli, who is the Chief Operating Officer and data scientist at Ritholtz Wealth Management.

In the book published recently by HarperCollins, he explains that buying the dip works only when you know that a severe decline is coming and you can time it perfectly.

Sharing the data for S&P 500, Maggiulli says buy the dip does well starting in the 1920s (due to the severe 1930s bear market), with an ending value up to 20% higher than DCA.

“However, it stopped doing as well after the 1930s bear market and is continually worse. Its worst year of performance (relative to DCA) occurs immediately after the 1974 bear market (starting to invest in 1975),” he said.

This 1975-2014 period is particularly bad for buy the dip fans because it misses the bottom that occurred in 1974. Starting in 1975, the next all-time high in the market didn’t occur until 1985, meaning there was no dip to buy until after 1985. Due to this unfortunate timing for buy the dip, DCA is easily able to outperform.

An economics graduate from Stanford University, Maggiulli also runs the famous finance blog OfDollarsAndData.com.

In the book, which offers some simple, practical and actionable advice on not just savings but also investing, he argues that if you just keep buying a diverse set of income-producing assets like stocks, bonds, etc, you will end up building wealth with ease.

So how is the just keep buying mantra different from DCA?

“The difference between DCA and “Just Keep Buying” is that Just Keep Buying has the psychological motivation built in. It’s an aggressive investment approach that allows you to put your wealth building on autopilot. It’s also much easier to say or remember than dollar-cost averaging,” he told ETMarkets over email.

Backed with easy to understand data, the book is interspersed with stories and anecdotes to explain all the 5Ws and 1H of savings and investing. Maggiulli doesn’t flinch from countering conventional financial wisdom and coming out with arguments like “credit card debt isn’t always bad” and “even billionaires don’t feel rich”.