Hi there,

Welcome to Finance Friday - level up your finance knowledge.

Finance Friday - Buy the Dip

What does it mean when you hear ‘Buy the dip’? Let’s look at an example from this week’s financial markets.

Bitcoin price in USD from August 2023 until yesterday (March 21st)

This chart shows the price of Bitcoin in USD from August 2023 until yesterday (Thursday 21st March 2024).

If you follow the red line you can see a significant drop on the right side of the chart from over 72,000 USD to about 62,000 USD.

Some people would view this significant drop in the price as a buying opportunity and recommend that you ‘buy the dip’. But should you?

Let’s think of an analogy.

Imagine you have your heart set on buying a new pair of trainers but they are just too expensive. However, suddenly you see them at a reduced price in the Black Friday sale. What do you do?

Do you view this as a buying opportunity?

It depends. Have you done your research on the quality of the trainers? Are they still fashionable? Do they fit? Are they comfortable? Do the colours suit you and do they match other items in your wardrobe? Have you already got similar trainers? Can you afford them even at the reduced price? Is there something else you would now prefer to buy or save your money for?

And so, you need to ask yourself similar questions for Bitcoin or any other equity

Have you done your research? Do you still believe that it is a good investment? Does the purchase fit in with your personal risk tolerance? Does the purchase sit well within the rest of your investment portfolio? Have you got other similar and correlated investments (correlation is when the prices of two investments are likely to move up and down together)? Do you have enough money to make the purchase? Is there a different opportunity that you would prefer to invest in?

Dangers of buying the dip

Before any obvious recovery, it is difficult to tell if the drop is a temporary dip or the start of a crash. In the case of Bitcoin, it could easily be the start of an 80% fall.

Hence, it is important to remember that ‘buying the dip’ is a strategy that typically works best within a long-term investment plan. The idea is that while the price might be down in the short term, it has the potential to recover and increase in value over time.

What is the worst reason to ‘buy the dip’?

The worst reason to buy the dip is because someone else tells you to - especially someone on the internet or writing newsletters!

Always, and I mean always, do your own research!

Questions & Answers:

Further to yesterday’s newsletter, I have received an excellent follow-up question. Thank you for the feedback.

Question: Is gardening leave the same as being sacked?

No. They are different. Let’s investigate further, again using an example from football.

José Mourinho

José Mourinho was believed to be sacked by Roma in January 2024. At that point, his contract would be terminated. He would immediately be free to seek work even with another Seria A club, if he wanted.

He would no longer be paid a salary because he would no longer have a work contract. However, he would have received a contract buyout from Roma effectively paying him for the remainder of his contact (in this case until June 2024).

Key differences

Do you have any Business English questions?

Please email me and I will do my best to answer them in future newsletters.

Until Monday - have a great day and a fantastic weekend!

Iain.

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