The tech sell-off: Should you buy the dip?

The dominant theme of 2023 and into 2024 had very much been artificial intelligence (AI), with strong performances from the Magnificent Seven, including the likes of Nvidia, Microsoft, Apple.

Heading into 3Q 2024, we saw some pullback as concerns began to build surrounding the high valuations of these US mega tech stocks. On 24 July 2024, driven by a tech sell-off, US stocks saw the worst wipeout since 2022, with the Nasdaq composite logging a 3.6% drop and Nvidia shares now down some double digits from its June 2024 intraday peak of over US$140.

So, naturally the question for some of us might be whether it is now an opportune time to buy the dip and average down on these tech darlings?

Should I average down on tech stocks?

To average down on a stock simply means to buy more shares of the same stock you own after it has fallen in value. When this is done, it lowers the average price level where you bought the stock.

The idea of buying more shares at a lower price you previously paid may seem appealing, as the price to break even for your investment would be lowered. And you might have a strong belief in the fundamentals of the company you are investing in. The assumption here is that any short-term volatility is not indicative of the long-term intrinsic value of the company. 

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

- Benjamin Graham, father of value investing

After all, this is how Warren Buffett invests: looking for companies with sustainable competitive advantages and that are building an investment moat. 

Companies such as Nvidia and Microsoft with its investment in OpenAI are in the forefront of the AI revolution. If the assumption is that AI will be a long-term structural trend, that the long-term growth prospects of these businesses remain, these pullbacks might be deemed to be short-term in nature.

The odds are stacked against stock picking

Yet, research has shown that it is difficult to beat the market by stock picking, even when buying securities at a discount. Buying at an intermittent dips has not shown to automatically improve your investment success.

Not all companies live to succeed

It may seem like the tech giants are infallible given their market position. But it is important to look back in history and appreciate that many large companies fail as the market changes.

Listed giants such as Kodak, Nokia and Yahoo, which were once multi-billion behemoths, had their businesses restructured and sold off in parts, before being delisted at a fraction of the prices they were traded at in their heydays.

For those who remembered, Tesla seemed to have been the Nvidia of its day back in 2021, when investors believed the long-term structural growth trend of electric vehicles is irreversible, and there is no better bet than the Tesla, dominant leader at the time. Fast forward to Aug 2024, its share price is 40% below its peak reached in Nov 2021, faced with increasing competition and cooling demand globally.

Closer to home, there was a time, China internet giants such as Tencent, Alibaba and Meituan (dubbed “ATM”) were once stock darlings of local Hong Kong investors. 

Take Tencent for example, its share price reached HK$700 in Feb 2021, before pulling back to mid HK$400 levels in the latter part of 2021, due to regulatory crackdowns to the sector. 

For those who bought on this pullback would have been disappointed, as the stock continued to drop to a trough of HK$190 in Oct 2022. It has since only recovered back to HK$360 levels as of early Aug 2024, still only about half of its peak.

Get the best chance of success with diversification and dollar-cost averaging

When markets experience interim pullbacks, it offers a good opportunity to reassess our risk appetite, and review our investment portfolio as a whole. 

Although it might be tempting to be betting on your favourite stocks, especially those you might have strong convictions on (just see all the reddit and LIHKG threads hailing “Nvidia to the moon”). It is important to understand the inherent risk of betting on single stocks. 

For long-term investors, especially when you are investing for accumulating long-term core wealth. Averaging down on the broader market through dollar-cost averaging might offer a higher bargain of safety. 

For example, the Endowus Flagship Portfolio has over 10,000 underlying securities that will capture recovery of the broader market, while also making sure that big swings of individual stocks do not overly impact your overall portfolio.

You can also consider a core-satellite approach and consider averaging in through a portfolio approach such as the Endowus Global Technology Portfolio or our suite of tech and AI-focused fund collection as a satellite holding.

Click here to get started on your investing journey with Endowus Hong Kong today. You can also schedule a free 1-on-1 consultation session with our SFC-licensed client advisors, who can answer any questions you might have.

Read more: 

• Your guide to dollar-cost averaging
• Is diversification dead?
• Why invest through Endowus

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