Averaging down experience

[Nortorious]

Hi All,

I'm still building my investment/trading plan and thinking about different strategies to employ for my long term investment decisions, and short term trading decisions.

In terms of long term investments, what are your thoughts/experience on an averaging down strategy if the situation arises to purchase additional shares at a discounted price?

Given the fluctuations that I have seen over the past couple of weeks, most notably the shock sent through the market from S&P's credit rating news, in future situations where a lower entry point exists, would you buy more shares at a discounted price if you have a long term view of the sustainability/growth of the company?

I'm interested in how this strategy can be used and if it is widely used by ASF members or something to be warned against.

Look forward to hearing from some of you!

 

[skyQuake]

Hi All,

I'm still building my investment/trading plan and thinking about different strategies to employ for my long term investment decisions, and short term trading decisions.

In terms of long term investments, what are your thoughts/experience on an averaging down strategy if the situation arises to purchase additional shares at a discounted price?

Given the fluctuations that I have seen over the past couple of weeks, most notably the shock sent through the market from S&P's credit rating news, in future situations where a lower entry point exists, would you buy more shares at a discounted price if you have a long term view of the sustainability/growth of the company?

I'm interested in how this strategy can be used and if it is widely used by ASF members or something to be warned against.

Look forward to hearing from some of you!

Too much depends on your view? imo if u're inexperienced (<3 years active trading) don't do it.
One bad stock and it'll take ages to get out of that hole (financially and psychologically) eg buying uranium stocks like BMN after the tsunami

 

[traderboi29]

Hi All,

I'm still building my investment/trading plan and thinking about different strategies to employ for my long term investment decisions, and short term trading decisions.

In terms of long term investments, what are your thoughts/experience on an averaging down strategy if the situation arises to purchase additional shares at a discounted price?

Given the fluctuations that I have seen over the past couple of weeks, most notably the shock sent through the market from S&P's credit rating news, in future situations where a lower entry point exists, would you buy more shares at a discounted price if you have a long term view of the sustainability/growth of the company?

I'm interested in how this strategy can be used and if it is widely used by ASF members or something to be warned against.

Look forward to hearing from some of you!

can i ask have you used this strategy before? or are you trying it for the first time?

 

[tech/a]

Personally Ive never considered it.
Why?
Because if I'm in a stock which isnt going my way I dont want to be in it let alone buy more of it.
Risk management (Mine anyway) doesnt include shovelling more money into an already losing position.

I wont do it in business or personal life so I'm not going to start now?
Averaging down in my opinion is held in high regard by those who cannot accept that their view may be in correct and cannot accept loss.
They live on hope and what could and should happen--if---when--or when everyone else---who are wrong---realises that they are right! These people will generally declare that a loss isnt a loss until you liquidate it.

Truth is --its a loss the minute its below your purchase price

"Radge---quote"
It doesnt matter that your wrong---only how long you stay wrong"

 

[KurwaJegoMac]

As the saying goes: "Cut your losses short and let your profits run"

Why would you want to be putting more money into something that's losing value? You're playing with the assumption that it will at some point return to the same value under which you originally made a purchase. This is not always the case.

Also wouldn't it be better to free up your capital and put it into stocks that are increasing in value?

 

[skc]

Hi All,

I'm still building my investment/trading plan and thinking about different strategies to employ for my long term investment decisions, and short term trading decisions.

In terms of long term investments, what are your thoughts/experience on an averaging down strategy if the situation arises to purchase additional shares at a discounted price?

Given the fluctuations that I have seen over the past couple of weeks, most notably the shock sent through the market from S&P's credit rating news, in future situations where a lower entry point exists, would you buy more shares at a discounted price if you have a long term view of the sustainability/growth of the company?

I'm interested in how this strategy can be used and if it is widely used by ASF members or something to be warned against.

Look forward to hearing from some of you!

Averaging down on its own is not necessarily evil. But it's a terrible excuse for people who can't admit they are wrong. I will average down on my uranium stock after the Fukushima meltdown is just recklessness.

Also, averaging down cannot trump your overarching risk management rules. E.g. I am committing $5K to a small volatile company... you may have only bought $2.5K and want to top up to $5K after a fall. But if you are already filled up then best to keep your exposure as is.

If you don't think you have the discipline / EQ to execute then probably better just have a rule that says never average down, period.

 

[Boggo]

Personally Ive never considered it.
Why?
Because if I'm in a stock which isnt going my way I dont want to be in it let alone buy more of it.
Risk management (Mine anyway) doesnt include shovelling more money into an already losing position.

I did it twice on the same stock a few years ago (AED - have a look at the weekly chart !), never again, an expensive but valuable lesson.

Below is an example of what I do now (YTC out on 21st Apr), I cannot understand why anyone would want to hold on while a stock is dropping.

(click to expand)

 

[danbradster]

Averaging down has worked well for me.

I try to pick shares that are undervalued, I try to be so confident in my decision that I am not second-guessing myself if it falls. If you have picked a good undervalued company that will move closer to its true value in the next year or so, then a lower price is more of a bargain.

My strategy usually takes 2 months to 2 years to unfold, but the averaging down part of it is a benefit in my experience.

Generally a 10%+ fall in SP, for no good reason, is a good opportunity to start topping up.

 

[jimmyizgod]

Averaging down has worked well for me.

I try to pick shares that are undervalued, I try to be so confident in my decision that I am not second-guessing myself if it falls. If you have picked a good undervalued company that will move closer to its true value in the next year or so, then a lower price is more of a bargain.

My strategy usually takes 2 months to 2 years to unfold, but the averaging down part of it is a benefit in my experience.

Generally a 10%+ fall in SP, for no good reason, is a good opportunity to start topping up.

...unless a 10% fall in SP is just the precurser to a further 20% fall

 

[KurwaJegoMac]

Generally a 10%+ fall in SP, for no good reason, is a good opportunity to start topping up.

How is it a good opportunity? A stock will rise or fall depending on the willingness of people to buy or sell that stock. If it's fallen 10% then more people are selling than buying - that is not a positive sign. Doing this you have your funds tied up in an asset that's deteriorating in value and will require an unknown length of time (potentially years) just to break even, let alone make a profit.

If it's falling in value why not get out quickly, cutting your losses short and waiting until their is support for your stock in the form of buyers and jumping in then? You preseve your capital and will get in at a better price than someone averaging down. Problem is it takes more effort and the willingness to upset you messed up and bought at the wrong time. The latter is what most people seem to struggle with.

If your investment is not making you money, you paid too much or bought at the wrong time.

 

[Reasons]

I did average down during the GFC with a couple of the banks, but psychologically it was not pleasant and it runs totally counter to standard trading and risk management practices. At the time there was mass speculation that dividends would never recover again so there was that overhanging doubt as well. I started committing small amounts once the market got so low that dividends of the major banks were at ridiculously high levels and followed them down about 20% until we fortunately got to 2009 and they bottomed. Logic at the time was that if the big 4 banks go bust what else was really going to survive, and that dividends were so high that the shares would become loved again eventually. I sold out far too early with hindsight.

I would average down again in a similar high fear scenario, but only when everything logical is screaming at me not to do it and I have some reasonable confidence that the companies in question will likely survive (based on logic that because if they don't, no others will either). You might find other non-GFC opportunities like a property crash that causes a similar bank share event or the high AUD drives down the price of good companies that aren't likely to go out of business, but causes sufficient panic perhaps.

Not suggesting it as a strategy, just a way of looking at companies and events that might make averaging down more logical in application compared to being considered a mainstream tactic. The bottom of a share is always zero if you get averaging down wrong and not generally considered smart logic without a risk management plan.

 

[Boggo]

If your investment is not making you money, you paid too much or bought at the wrong time.

Exactly, simple really.

For those thinking of averaging down or believing company fertiliser you should have a read of the AED thread, particularly around the time when it started to topple.

I believed some of the nonsense for a while until I saw just how much I could lose (and would have had I held). It did hurt to sell but I am so glad now that I did.

A couple of posts from that thread around the time it was falling over in Oct 2007 when it was >$9.
It is currently trading at $0.235 !
I still see these sort of posts daily on here on other threads.

A lot of people followed the sheep today fair enough its their right to be wrong!
if people read the announcement properly "As water handling and gas lift facilities have not been fully commissioned,oil production levels will remain lower than initially forecast while works are being completed." and that during this period preliminary assessments suggest that the ongoing production rates are likely to be approximately 20,000 to 25,000 bopd. WHILE WORKS ARE BEING COMPLETED Those that sold today will be first to buy back in once project is fully commissioned BUT at what price
cheers laurie

I'm in for the long term too. I'm not greedy or wearing rose tinted specs but AED has a long way to go yet in my opinion. I agree with Laurie that todays action is short sighted by many who haven't properly understood the latest announcement ie. that this is a temporary glitch and nothing to panic about.

PS. I know its easy in hindsight to post these examples, I feel I am entitled to as I was a victim in the initial decline and spin.
I am hoping though that people learn from this type of scenario. AED was being talked up by management, numerous brokers recommending it and it appeared on Comsec's top ten buy lists as it was about to collapse, ie based on fundamental nonsense it was a great buy !

 

[Wysiwyg]

I am in the Boggo's experience camp though I do wonder what poster ROE has to say on the subject. I'm not 100% sure but I think he held and bought more of his holdings during or near the end of the USAFC. Maybe averaging down works with good companies in a market meltdown?

 

[sinner]

So nobody is going to dicuss the difference between averaging down in a single instrument, and averaging down in an index fund, where recency bias could actually work in your favour?

 

[Country Lad]

"Averaging down" is a term devised by the proponents of that activity because it sounds better than "losing money". The real name is "buying shares which are losing value". Intersting that there is not a commonly used term "averaging up". If the price is going down it is for a reason - the market is saying that it is no longer in favour and has moved on.

There are 2 parts to "averaging down", and to me, both are an anathema. The first is the fact that the original parcel is being held while it is falling instead of selling and buying one rising in price.

The second is compounding the error by buying more of a falling share instead of a rising share.

Also the commonly used term associated with falling shares is "it is under valued" should be viewed with suspicion. Under valued by whom? Certainly not by the people in the market doing the selling and of which there are many for a falling share and certainly not buyers who are missing in action otherwise the price would not be falling.

So the shares held during the retracement have fallen, let's say, 20% and are no longer "under valued" because the market has walked away and they are out of favour and they are now correctly valued by the market. It will need to rise 25% to break even. Add to that the opportunity cost by not selling and then buying a rising share?

"Average down"? I never have and never will, my objective is to hold winners, not losers.

Cheers
Country Lad

 

[Reasons]

So nobody is going to dicuss the difference between averaging down in a single instrument, and averaging down in an index fund, where recency bias could actually work in your favour?

I will average up or down in high probability long or short counter trend trades when the divergence and swings are doing what I need them to, both in specific indicies and shares, but not sure what you are indicating about index funds and recency bias'.

I am interested.

 

[skc]

Maybe averaging down works with good companies in a market meltdown?

Of course averaging down works when the price goes back up.

Average down on AED or Babcock or ABC learnings and it's a disaster.

Average down on CBA or MND or MMS and you would have done well.

We can all come up with examples of how averaging down worked for somes shares and didn't work for others.

The problem is not averaging down per se - it is the fact that the investor/trader was no good at picking stock or recognising change in the first place. For the average investor/trader, adopting a "NEVER AVERAGE DOWN" stance may be prudent, but it doesn't make it gospel.

 

[KurwaJegoMac]

So nobody is going to dicuss the difference between averaging down in a single instrument, and averaging down in an index fund, where recency bias could actually work in your favour?

IMO if you're skillful enough to know that an index has been dampened due to a recency bias and is due to return to normal levels soon, you shouldn't be averaging down - you should be selling all that you hold and waiting until the index hits support and then buying in.

E.g. plenty of people sold on the Japanese tsunami ASAP and bought in a few days later when the fall had become overextended and positive news (and buyers) started to return. If you're experienced enough you can see these things coming (although you cannot predict them with certainty or time them with certainty of course - but you can get close).

Simply put: Every time you average down you're wrong - You paid too much or did not buy near the bottom. If you were right about a stock you wouldn't need to average down. Hence no use compounding a loss. Kill it while it's small and wait for the moment when you feel that events leading to the initial recency bias are slowly being resolved and then jump in on the positive upswing and momentum.

 

[KurwaJegoMac]

Of course averaging down works when the price goes back up.

Average down on AED or Babcock or ABC learnings and it's a disaster.

Average down on CBA or MND or MMS and you would have done well.

We can all come up with examples of how averaging down worked for somes shares and didn't work for others.

The problem is not averaging down per se - it is the fact that the investor/trader was no good at picking stock or recognising change in the first place. For the average investor/trader, adopting a "NEVER AVERAGE DOWN" stance may be prudent, but it doesn't make it gospel.

Well said Skc. Agreed - I acknowledge i'm a bit harsh in my stance regarding this but I think that as a beginner one needs to learn how to cut losses short rather than take the risk of averaging down (which as you say may or may not work).

 

[Wysiwyg]

Of course averaging down works when the price goes back up.

Yes and I suppose the real answer lies in whether averaging down is, over time, a profitable trading strategy. Most agree it is not.

For the average investor/trader, adopting a "NEVER AVERAGE DOWN" stance may be prudent, but it doesn't make it gospel.

If the stock index drops yet a particular company has an historical resilience and product demand can be one of those times.

E.g. plenty of people sold on the Japanese tsunami ASAP and bought in a few days later when the fall had become overextended and positive news (and buyers) started to return.

Stock market participants buy because others are buying and sell because others are selling (reflected in charts). Watching the news can accelerate both conditions.