MIS-SELLING STOCKS: "Buying the Dip", "Averaging In" and "Buy and Hold"

Das argues that many expressions used by financial advisers are an attempt to defend bad advice. Cheekily, he puts ''buying the dip'', ''averaging in'' and ''buy and hold'' into this category.

"If you believe that shares only go one way, which is up, then every time they go down, it's a buying opportunity,'' he says. ''If a stock was good value at $10 then it must be cheap at $9 and a bargain at $8. People forget that the lowest it can go is zero."

Averaging-in, or dollar-cost-averaging, is a strategy designed to avoid trying to time the market and investing all your money at the wrong time.

The idea is that by investing small amounts regularly you buy more when prices are low and less when prices are high. Left to their own devices, most people do the opposite.

This works well in a rising market but when prices are falling you simply throw good money after bad and keep fund managers in business.

"The only way out of a hole is to stop digging," Das says.

The buy-and-hold strategy is based on the premise that if you hold a stock long enough it will make money.

This may be true for good quality stocks some of the time but it is not an excuse to nod off at the wheel. Some stocks are lemons and there are times when it pays to reduce your overall exposure to shares and invest in something that provides a better return.

"People forget that after the 1929 crash it took 25 years to recover,'' Das says. ''The Japanese market has never regained its high of 1989."

Reverse Your Emotions. React Intelligently to the Market. It freaks out from time to time.

Benjamin Graham:  "Nobody ever knows what the market will do, but we can react intelligently to what it does do."

If the price is rising and everything you liked about the company still persists, such as strong earnings, high margins, low debt, and steady cash flow, then you might decide to invest more.  The market is finally recognizing what a great company you're invested in and people are beginning to buy.  As William O'Neil recommends, you should move more money into that winner.  Business owners buy more of what's working.

If the price is falling and everything you liked about the company still persists, you just stumbled onto a great company at a bargain price.  It's incidental that you happen to already own shares purchased at a higher price, you still have the chance to buy a great company on sale.

Think of owning property.  Say you bought a 10-acre parcel at $5,000 an acre because of its beautiful meadows and stream.  You build your dream home there.  Two years later, another 10-acre parcel adjacent to yours goes on sale for only $2,000 an acre.  It contains different parts of the same beautiful meadows and a different section of the same stream.  Would you react by selling the land and home you already own?  Of course not!  It's still beautiful.  Instead, you'd snap up the adjacent lot because of its identical beauty and the fact that it's selling at 60 percent less than what you paid for the first parcel.  That, in a sense, is exactly how you should react when a perfectly solid company drops in price without any fundamental reason for doing so.

React intelligently to the market.  It freaks out from time to time, but you don't need to.

• If the market goes haywire and drops the price of your company for no reason, smile coolly and buy more shares.  
• If the market goes haywire and drives the price of your stock through the clouds, buy more on the way up. (However, don't buy and consider selling bubbly priced stock).

Master investors say to buy more of what's working and to take advantage of price dips.  That seems to mean that no matter what's happening, you should buy more.  That's only true regarding price.  Price is not really the most important thing.  It seems to be and it's eventually the bottom line, but in the course of stock ownership there are a lot of things more important.  For instance, Warren Buffett keeps an eye on profit margins and return on equity.  If the company remains strong and keep doing everything right, the market will eventually catch on and the price will rise.

If you bought quality companies after conducting thorough research, you have little to fear in the markets.  You will prosper over time.  The market will rise and fall, gurus will claim to know where it's going and when, you will hold winners and losers, and by reacting intelligently to all this cacophony your profits will mount.

Stocks for the long run - buy the dips

Most investors claim to retain their faith in stocks as the best long-term investments. Experience showed that market sell-offs were indeed ideal times for investors to commit more to the market. The mantra of the common investor in the 1990s was "Buy the dips."

Despite the steadfast faith in the market, the bear market of 2000 - 2001 has raised doubts in many minds about the desirability of holding the overwhelming proportion of a portfolio in stocks.

• Has the continued popularity of the stock market planted seeds of its own destruction?
• Have investors sent equity prices so high that they cannot in the future possibly match their superior historical returns?

The answer to these questions must come from an understanding of how stock prices influence their future returns.