TL;DR
A Reddit post promoted buying stocks that had already plummeted, showing high returns in a backtest. However, this ignored survivorship bias; the strategy’s actual risk is far higher than advertised, leading to potential devastating losses for investors.
Story
The ‘Buy the Dip’ Delusion: A Grim Fairy Tale
John, a retiree, saw a Reddit post: buy stocks that crashed 50%, and get rich. It sounded too good to be true, like a get-rich-quick scheme from the 1920s, but desperation (and the recent market downturn) clouded his judgment. He poured his life savings into the strategy. The results? Well, some stocks did rebound spectacularly, but many turned to dust. The author presented this as a winning strategy, but it’s akin to gambling on a roulette wheel with loaded odds.
How the ‘Dip’ Scam Works:
The post touted investing in S&P 500 companies that had already fallen dramatically. The backtest showed impressive returns focusing on companies that had fallen 75% or 90%. However, this is survivorship bias. ‣ Survivorship bias: Only including companies that survived the crash hides how many failed completely. It’s like showing only the winners of a lottery, ignoring the millions who lost.
The Human Cost:
John, along with many others who followed the advice blindly, is now facing financial ruin. The post’s ‘success’ is based on cherry-picked data. A few big wins mask the many catastrophic losses that are omitted. It’s the same trick used by boiler rooms, ‣ Boiler rooms: Illegal operations that aggressively sell worthless securities, promising huge returns—except, it’s all a lie.
Lessons Learned (The Hard Way):
- Past performance is NOT indicative of future results. This is a fundamental investing principle that was ignored. The strategy worked in the specific period analyzed, but this is no guarantee of success.
- Survivorship bias is a killer. Only looking at what succeeded hides the brutal reality of many failures. It’s like looking at only the top 1% of income earners and claiming it’s representative of the entire population.
- Never gamble your retirement. The strategy is extremely risky, suited only for those with considerable risk tolerance and a much longer time horizon than retirement. Investing in individual stocks is already inherently risky; concentrating on already-fallen stocks magnifies those risks significantly.
Conclusion: The Market’s Cruel Joke
The ‘buy the dip’ strategy, while presented as a clever hack, is simply another version of the age-old dream of easy riches. It relies on ignoring the harsh realities of market crashes. The author presents only selective data, completely ignoring the potential loss. Remember Enron? Remember 2008? Those were dips too; few came out ahead. The market, like nature, is indifferent to human desires. Don’t let clever graphs and misleading data fool you—investing wisely demands caution, patience, and a healthy dose of skepticism. Never trust something just because it’s on the internet.
Advice
Ignore get-rich-quick schemes. Diversify your portfolio, and never invest money you can’t afford to lose.