Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / Why Buying the Dip Is Harder Than It Looks
Transcript
- Lucas: So the S&P 500 is sitting at about 7,792, up four tenths of a percent over the last five days, and the VIX is down to 14.71. On paper, this looks like a healthy, calm market. But I keep coming back to something that's been nagging me: how many of us are actually ready to buy when the dip finally comes? Luna: You mean the dip we've been waiting for all year? The one everyone's been buying in theory but not in practice? Lucas: Exactly. And I want to dig into that gap between what we say we'll do and what we actually do when the market drops three percent in a week. Because the VIX being this low doesn't mean the next dip is canceled. It just means we're not paying attention to the risk right now. Luna: So what does the data say about how retail investors actually behave during pullbacks? Because my guess is we're all terrible at it. Lucas: Well, there have been plenty of studies on this. One that stuck with me was from a brokerage, showing that in the last major correction, the average retail account that was active during the drawdown ended up selling near the bottom and buying back in about ten percent higher. We talk about buying the dip, but our instincts push us to sell the dip and buy the rip. Luna: So we're our own worst enemy. But what about the people who did buy that dip? Did they actually make money, or did they just get lucky? Lucas: That's the thing. Some of them did fine, but a lot of them bought too early. There's this term I love, catching a falling knife, and it's real. The people who bought the first dip in 2022, for example, watched their portfolios drop another fifteen percent before things stabilized. So the question isn't just should you buy the dip, but how do you know when the dip is actually the bottom? Luna: And that's the million dollar question. So what's the framework? How do you tell a real bottom from a pause before more pain? Lucas: Well, let's start with what's happening right now. The ten-year Treasury yield has been hovering around 4.7 percent, and the spread between the ten-year and the two-year is only about 48 basis points. That's a very flat curve. Historically, a flat or inverted curve has been a pretty reliable warning sign that growth is slowing. And when you pair that with real GDP growth at 1.5 percent, down from 2.1 percent, you've got a market that's priced for a soft landing but an economy that's clearly cooling. Luna: So you're saying the dip we're all waiting for might be less of a dip and more of a slow grind lower, the kind that just wears you down. Lucas: Right. And that's the sneaky part. A 5 percent drawdown that takes six months doesn't feel like a buying opportunity. It just feels like a bad year. Meanwhile, a 5 percent crash in two weeks feels terrifying, but it might be your best chance. The problem is our brains are wired to overreact to speed, not magnitude. Luna: That's a great point. So what's the practical takeaway? If I'm sitting on cash, how do I actually decide when to deploy it? Lucas: Look, there's no perfect formula, but there are a few rules I try to follow. First, you need a thesis for what you're buying. Not just 'the market is down,' but what specifically is undervalued and why. Second, you need a plan for how much you're willing to lose before you admit you were wrong. And third, you need to size your position so that being early doesn't wipe you out. That last one is huge. Luna: That's a really practical way to think about it. And it reminds me of Bill Ackman's recent move with Netflix. He bought back in after being out for four years, and he said it's because he thinks Netflix has won the streaming wars. That's a thesis, not just a dip buy. Lucas: That's a perfect example. Ackman didn't buy Netflix because the stock was down. He bought it because his view on the competitive landscape changed. The stock might have been down, but that's not the reason he bought. And that's the discipline that separates a real investor from someone just hoping for a bounce. Luna: So it's less about timing the bottom and more about having a reason that's independent of the price chart. How do you know when your thesis is wrong, though? Lucas: That's the hard part, and honestly, it's where most of us fail. You set a mental stop before you buy. If the reason you bought is no longer true, you get out. Not because the stock is down, but because your thesis is broken. That's the only way to survive a real bear market. Luna: That makes sense. And it's so easy to say, but so hard to do in the moment. I've definitely held losers way too long because I didn't want to admit I was wrong. Lucas: We all have, and the market punishes us for it. But here's the good news. You don't have to be perfect. You just need to be less wrong than everyone else, and you can do that by being systematic. Write down your thesis, write down your exit condition, and then follow it. That's the closest thing to a superpower in this game. Luna: You know, I'm glad we're having this conversation, because it's really easy to get caught up in the daily noise. And speaking of that, I've been thinking about listener support. We've been doing this show for a while, and it's completely ad-free, which I love, but that's only possible because a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small group, but it's enough to keep us going. And it's not about perks or anything. It's just that our community values the kind of discussions we have, and they want to keep them free and independent. We really appreciate that. Luna: So if you've ever gotten something out of one of our episodes, and you have a couple bucks to spare, that link is there. But let's get back to the dip, because I want to talk about the yield curve again. You mentioned it's flat at 48 basis points. How does that affect the strategy we just talked about? Lucas: Good question. A flat curve tells you the market expects rates to stay put for a while, which usually means growth is going to be sluggish. That's not the environment where you want to be aggressive with dip buying, because there's no obvious catalyst for a quick recovery. You might be waiting a long time for your thesis to play out. Luna: So maybe the best move is to be more patient, wait for the dip to actually form a base, and not try to catch it on the way down. Lucas: Exactly. And that's where the VIX can help, even at low levels. A spike in the VIX, like above 20 or 25, often marks capitulation. But you don't want to buy the first spike. You want to see it fall back and hold. That's a classic sign that the selling is exhausting. Luna: So you're saying to watch for the VIX to spike, then settle, and that might be your signal to start nibbling. Not to go all in, but to start building a position. Lucas: Right. And you scale in. You don't buy everything at once. You buy a third, then if it goes lower, you buy another third, and so on. That way, you're never fully exposed too early. It's not exciting, but it works. Luna: It's funny, because this all sounds so rational when we talk about it, but in the moment, it's pure anxiety. I think that's why having a plan written down is so important. You have to take the emotion out of it. Lucas: And that's the real lesson from today. The market is calm right now, the VIX is low, and that's exactly when you should be writing your plan, not when the panic hits. Because when the panic hits, it's too late to think clearly. You've already made the decision, and you just execute. Luna: That's a great way to end. Thanks for breaking this down, Lucas. I feel a little more prepared for whatever comes next. Lucas: Anytime. And remember, the goal isn't to be a hero. It's to be a survivor. That's how you build long-term wealth.