Sometimes and especially in the shakiest markets, a portfolio’s best defense is dip buying. As with any investment, questions must be answered on both sides of the transaction. On the one side are questions about the stock being purchased. Today, everyone asks: does the company rely on a lot of credit or have a lot of debt? On the other side, are questions about purchasing power; questions about how putting this money out right now might alter your own bottom line. So, how ’bout it, do you rely on a lot of credit or have a lot of debt?

With dip buying, one of the most important questions is: How long-term are you playing it? Keep that in mind when reflecting on any otherwise important fundamental. This is because the nature of dip buying is based in time; taking advantage of shorter term or quick downturns resulting in longer term or slow recoveries. Obviously, you want to be careful about buying at an unrecoverable point in the price dip, and you want to prefer entities with dividends, because that will help you hedge.

Follow the market sentiment, understand the entity your purchasing, and above all else look into management and the company history. Remember dip buying means trying to predict the effect downturns have on capitalization and in turn how that will effect future plans in the company, the sector, but even entire industries. Remember that dip buying is about taking a stance on a downturn’s basis in hype. Always keep a sharp focus on the reasons you made a respective trade as useful conviction when faced with further downturns. Or, as a means of knowing when to get out. No one truly knows what tomorrow might bring.

As such, I recommend balancing this type of portfolio with a diverse set of yielding blue chips with dividends of at least 2%. Do not re-invest these dividends as they will help recoup cash value lost on any down swings in your speculative purchases that do not carry dividends. Then, sit back for the length of your term and watch, because its always interesting what can develop over time when dip buying.

Dip Buying in the Real World

A fantastic example of dip buying, unfortunately scarred with what will seem nearly criminal hedging, is the Bank of America (BAC, 39.79, +0.40) and Countrywide (CFC, 5.98, -0.07) merger. The latest move in BoA’s investment into Countrywide as reported in CNN explains BoA may just leave the debt to someone else. Now thats hedging!

A BofA spokesman didn’t return two calls seeking comment. But if BofA walks away from the debt, bondholders - including state pension funds - could suffer catastrophic losses. Institutional Risk Analytics principal Christopher Whalen, who noted BofA’s ambiguous stance on Countrywide debt in previous filings, wrote this week that should BofA decide not to guarantee the Countrywide debt, investors could resume their flight from the debt markets.

This of course could have a very interesting impact on the stock market. I wonder how long before the time-release, poison pill frankensteined by the stock markets and the Fed creates other opportunities for us dip buyers. I mean, BoA isn’t exactly without risk, chancing to buy Countrywide.

Confirming that assessment, the Calabasas, Calif., lender reported dismal first-quarter results this week. Countrywide’s $893 million loss included a $1.5 billion provision for loan losses. More important, delinquencies grew across all mortgage product lines, including adjustable rate mortgages, which saw 9.4% of the portfolio go 90 days past due. That means BofA could face substantial losses on Countrywide’s portfolio.

Another related merger story is Sun Micro’s (JAVA, 12.64, -3.69) purchase of the relational database MySQL — not that it helped the stock any, you might say this dip came on the reverse side (commonly called defect spending). This did however give me reason to dip buy Sun Micro, despite the company floundering for some time (CNN also reported on this current trouble).

For me, this dip buy comes from my love of Sun Micro over the years (the technology not the stock). This purchase was about believing Sun makes good hardware and decent software and now have more in the way of very good software to sell. Hopefully Sun management figures out how to sell it — being wrong for so long ought to educate.

The results for the latest quarter include costs of 4 cents per share from Sun’s $1 billion acquisition of open-source software company MySQL AB, a purchase that gives Sun a foothold in the rapidly expanding market for database software for Web-based companies.

Analysts surveyed by Thomson Financial were expecting Sun to earn 18 cents per share, so the miss spooked investors.

Marc Andreessen examined the unspoken concerns for both sides in Microsoft’s (MSFT, 29.21, -0.19) dip buy of Yahoo (YHOO, 28.67, +1.86) — and yes this is a dip buy on all sides despite the possibility you don’t see it. This is a dip buy in that Google upset the advertising market across the entire planet, which now relative to the Internet would correct itself, favoring the likes of these competitors Microsoft and Yahoo — that was one dip.

The other dip came when both MSFT and YHOO shareholders realized both companies were losing ground on these many fronts and seemed desperate to reclaim it. Taking advantage of the change and in the wake of the Google-made upset, Microsoft saw reason to move on Yahoo. And, as only irony would have it, to look at the numbers involved, you can use something produced with Google Docs, the MSFT/YHOO merger calculator.

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Full discolsure: I made plenty on GOOG in the past but dont own any now. I’ve dip bought and currently own MSFT and YHOO (on merger news), and JAVA (on news of these recent losses). I don’t own BAC or CFC, nor would I buy either even if it was with your money.