In Today's Market, Buying on Dips Isn't Easy

We have now had two designated Common Sense buying opportunities in 2007. The first, in August, lasted about four hours. Last week's was even shorter, measured by hours the market was actually open. The Nasdaq dipped below my threshold Monday afternoon, and opened above it Tuesday morning.

What's going on here?

First, let me reassure investors who missed these fleeting opportunities. I have often counseled that it's good to be prepared, but also that life should not be spent glued to a computer screen watching stock movements. As I reported in August, I was able to take advantage of the first correction because I spent some time the night before preparing my shopping list. Last week offered no such luxury. You either moved Monday afternoon or you were left out. This time I was left out.

True, the market had been falling sharply all month. The Nasdaq was moving into a range where you could argue I should have been gearing up to buy. Two weeks ago I pointed this out and urged investors to be prepared. I hope many of you were. It's always embarrassing to be found ignoring one's own advice. Still, I expected another buying opportunity to last at least a day or two. I don't think that's so unreasonable.

As I've said many times, the goal of the Common Sense system is not to pick market "bottoms," a task which is inherently futile. It is simply to buy stocks when they're cheaper, and to sell when they've gained, to buy lower and sell higher. It is thus rather eerie to me that two times in a row my buying target has also turned out to be very close to an interim market bottom.

I'm not so egotistical to think that so many investors are now following the Common Sense system that these "bottoms" are becoming self-fulfilling prophecies. But perhaps there are other systems out there that also call for buying on 10% corrections. Is this what all these "quant" strategists are being paid to do? Surely their black boxes are more impenetrable and sophisticated. If not, they're grossly overpaid.

There's no way of knowing for sure, and two incidents of this nature hardly make a trend. But there's an easy way to stay ahead of copycats, which is simply to change the formula slightly. There's no law that the thresholds need to be 10% declines and 25% gains, which is the Common Sense system. I like those because they correspond to historical averages and, more practically, they make the math so easy you can do it in your head.

If you want to trade a little more often, make the thresholds smaller, such as buying on 8% declines and selling on 20% gains. If you want to trade less, increase the thresholds. To really throw people off, change them occasionally. The beauty of such a simple approach is that you can customize it to your own circumstances.

Bear in mind that there are consequences. Shrinking the thresholds will increase your trading activity and may also reduce returns slightly. You will capture more buying opportunities, but will also find yourself buying too soon more often. You will similarly have more selling opportunities, but in big bull markets, will be foregoing some gains. If you expand the thresholds, the opposite occurs. This year, for example, there would have been no buying opportunities so far, and you would likely have found yourself accumulating cash while the market rose (and fell).

Then again, you can stick to my original system, which is what I plan to do. This week investors seem to have returned to their bearish mood, which is a reminder that as long as there's volatility, there will always be more buying (and selling) opportunities. Last August, I predicted investors would get another chance, and they did. I'll make a similar prediction now.