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- 22 November 2010
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If you do it repeatedly you may win.
Eventually you will pick the wrong company.
I know I did, it cost me bigtime!
Not only in money terms but the setback in time as well!
If you do it repeatedly you may win.Yes and I suppose the real answer lies in whether averaging down is, over time, a profitable trading strategy. ...
Great summary.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.
Great summary.
I've never averaged down and never would. Holding falling stocks makes me totally uncomfortable.
But I remember after the worst of the GFC falls we had a conversation a bit like this one, and a few posters described how well they had done by indeed averaging down on companies they were confident would come through well.
They were right: those companies did recover quickly and well.
So perhaps the strategy should not be written off but rather regarded as sometimes useful if you understand the companies concerned well, and have enough experience to justify your expectations of their recovery.
... sometimes useful if you understand the companies ....
No need to persuade me of this, Tech. I agree absolutely. Just trying to be objective about what has apparently worked for others.But buying in any bear run which extends over a longer period is plain crazy.---in my opinion.
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?
Julia.
You'll note when an index crashes there is ALWAYS a good bounce.
if you time that right then it can work well.
But buying in any bear run which extends over a longer period is plain crazy.---in my opinion.
I am never totally comfortable psychologically doing it, especially during a down swing as hard as the GFC, but in reality it is actually nothing more than a logical and calculated risk-reward bet with something like a bank in the ASX top 20.
Eg, once the price has crashed down to a point that it is delivering ~10% net dividend, what is the likelihood of it dropping from its present price and delivering say a ~15-20% net dividend and holding that level because no-one will ever be interested in the risk of an ASX top 20 share unless it is providing a 15-20% net return, as opposed to finding support and going up again to at least slightly more normal levels? Fairly high; just does not feel that way at the time. If it keeps dropping you keep buying based on your logic.
You sound like one of those Telstra 'investors'.
...unless a 10% fall in SP is just the precurser to a further 20% fall
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.
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.
Every time you average down you are wrong?
Can we extend the discussion to a particular stock, let's say RIO, which today is down more than 1%, extending losses over earlier days.
The XJO and XAO are down by about half a percent.
Do you buy this now and continue buying if it continues to fall?
If you are holding and would, in terms of your usual criteria, be stopped out, sell?
Or do you say, hey of course it will turn back up again?
Or, in the face of the rising $A dollar which doesn't look like changing its upward course, do you consider the SP of RIO, and other big miners and manufacturers for that matter, will continue to be depressed?
I disagree with your "simply put". Every time you average down you are wrong? What if I have a trading plan like:
* At the start of every quarter, allocate 10% of net quarterly savings to index fund.
That's just an example, but there are plenty I can think of where averaging down is not "wrong".
I know some FX traders who like to "sell a little on the way up and a lot on the way down" or "buy a little on the way down and a lot on the way up", these guys have a turnover and bottomline P&L that makes me green with envy. I have my own intraday strategy based on correlation which does this too. Are we
"wrong"
Can we extend the discussion to a particular stock, let's say RIO, which today is down more than 1%, extending losses over earlier days.
If you are holding and would, in terms of your usual criteria, be stopped out, sell?
Or do you say, hey of course it will turn back up again?
...picked a good undervalued company...
Or when OAK:ASX announced that the CEOs shares went into receivership, the SP fell 30% the next day, again blind selling, I was topping up. A few months later the SP has doubled.
This is not the case with RIO but as an aside if you look at a chart of MND it may still be until it tells me otherwise.
In either RIO or MND I would not be still holding, I would rather be watching from the the sidelines.
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