Averaging down experience

[Country Lad]

Because she thinks that averaging down is such a bad idea, she decides not to buy. And because she doesn't like to hold on to losing positions, she sells the original package.

How can a minor event a year or two ago that couldn't possibly have an effect on the future prospects of a company change someone's decision from buying shares in that company to selling its shares instead?

Averaging down is indeed a bad idea, however I don't think your case really qualifies as that.

Averaging down is generally a case of falling in love with the company and not willing to admit that the share is not going according to plan and watching it continuing to drop in price. The bad idea part is not only to continue to hold the falling share but then to buy more as it is falling instead getting out and buying other shares which are going up.

Yours is a different case. She hasn't been watching it go down and buying more. Being a year or 2 later, it could very well be a case of changes in management/direction making it a different company to what it was previously.

I do not average down a falling share price under any circumstance but in this case, I would have treated it as a new investment.

Anybody trading with a bad memory should be keeping extensive notes.

Cheers
Country Lad

 

[Klogg]

Averaging down is indeed a bad idea, however I don't think your case really qualifies as that.

Averaging down is generally a case of falling in love with the company and not willing to admit that the share is not going according to plan and watching it continuing to drop in price. The bad idea part is not only to continue to hold the falling share but then to buy more as it is falling instead getting out and buying other shares which are going up.

I don't agree entirely. In the short term, the valuation of a company (refering to Value Investing only) may not be realised, but over a year or two it will.

I averaged down a LOT (as in, many parcels purchsed after a SP decrease) with TGA and a little with RCG - both up over 30% now for me in approximately a year (yes, the markets gone up a lot too).
That being said, my purchase prices were only decreasing by approx 5-10% at most.

In my view, if I'm that confident in a company, I'll average down (I only own 6 companies atm, so I may be very selective).
Perhaps I was just lucky, but that's been my experience with it so far.

 

[Country Lad]

I don't agree entirely. In the short term, the valuation of a company (refering to Value Investing only) may not be realised, but over a year or two it will.

In 30 years playing this game I have never bothered about valuing a company. Ask 10 brokers or economists to value a company and you will get 10 different answers. My view is that it is pointless doing a valuation as the value is clearly defined by the market. Those 10 may value it differently, but right now the value put on it by the market counts.

From there it is entirely market sentiment which will change the valuation. What the company does from now and how the market moves will determine the value in the future. That is why my primary indicator is market sentiment.

Cheers
Country Lad

 

[leyy]

Agreed.

I've only averaged down one stock in my life time which was 3 years ago.

Very costly mistake and will never do it again. I averaged down 3 times on the same stock and lost in excess of 70% of the equity.

Now I have stopped averaging down my portfolio is much more profitable and i cut my losers asap and deploy capital elsewhere.

Having said that I "Average up alot"

 

[So_Cynical]

Averaging down is indeed a bad idea, however I don't think your case really qualifies as that.

Averaging down is generally a case of falling in love with the company and not willing to admit that the share is not going according to plan and watching it continuing to drop in price.

LOL i can say with absolute confidence that im not in love with APN...actually far from it.

CL - if averaging down is such a bad idea, how is it that i have so many stocks that have come good? of the list below, every single stock went against me, the vast majority of them by more than 5% , every single stock was purchased in a down trend and yet 84% of them have turned around.

I find comments like "falling in love with the company" and "not willing to admit" condescending and way to simplistic, in fact comment like those demonstrate a complete lack of understanding for the reasons to average down and instead support misleading generalisations.

In my opinion.

---

Below is a screen shot of the % profit and loss by stock of my whole current (open) portfolio...stocks are marked and not marked, to indicate where averaging has and hasn't taken place, also where profit has and hasn't been taken at some previous point in time....clearly demonstrating that like all investment decisions there are 2 sides to the out come.
~

 

[pacestick]

worked for me on a couple of occassions but you have to be absolutly certain that the company is going to come right and not be restricted by your own time frames otherwise its throwing good money after bad .
This is how it worked on acn for me

1321 shares at $1.00
2223 shares at 0.225
8226shares at 0.091

sold the lot to DLS takeover at 0.285

 

[Bill M]

I averaged down with many of my holding during the GFC in 2009. I am a long term dividend income investor and buying during that time was one of the best investment decisions I ever made. I completely detached myself from all the doom and gloom merchants and bought what I thought was good solid stocks at ridiculously low prices. If it happened again I would do exactly the same thing, it is paying for my retirement now, cheers.

 

[Ves]

In 30 years playing this game I have never bothered about valuing a company. Ask 10 brokers or economists to value a company and you will get 10 different answers. My view is that it is pointless doing a valuation as the value is clearly defined by the market.

Where you see confusion or misconception, I see opportunity from this situation.

 

[burglar]

... if averaging down is such a bad idea, how is it that i have so many stocks that have come good? ...

You have patience in abundance, a prerequisite virtue when averaging down.
Some debate you would have done better if only you had done this or done that ...
These alternative strategies require different virtues (gallantry as an extreme example).

Know yourself, know your strategies and good luck to your family!

 

[So_Cynical]

worked for me on a couple of occasions but you have to be absolutely certain that the company is going to come right and not be restricted by your own time frames otherwise its throwing good money after bad .

And not be restricted by your own time frames... that's the key to it all, time and having it work for you.

You have patience in abundance, a prerequisite virtue when averaging down.
Some debate you would have done better if only you had done this or done that ...
These alternative strategies require different virtues (gallantry as an extreme example).

Absolutely agree...its a prerequisite for what i do and i suppose that goes for everyone else that profits from time, patience, fear and the need of others to preserve capital.

 

[Trembling Hand]

clearly demonstrating that like all investment decisions there are 2 sides to the out come.

So_Cynical there is a time where a certain approach works like..... well "magic". BUT the only certainty that I now know about trading that I have learnt from over 11 years of extremely active trading (thats is 100,000s of real trades with real money with a very vast array of systems) is after about 3 or so years they just break.

They do.

Right when you really start to define what you are good at and step up the size. This isn't just personal experience by the way. Traders that I know who have been around longer than 2 market phases are very adaptable. Ones that refuse to be honest with how the market phase is rewarding them are the ones now not trading.

Just saying

 

[So_Cynical]

So_Cynical there is a time where a certain approach works like..... well "magic". BUT the only certainty that I now know about trading that I have learnt from over 11 years of extremely active trading (thats is 100,000s of real trades with real money with a very vast array of systems) is after about 3 or so years they just break.

They do.

Right when you really start to define what you are good at and step up the size. This isn't just personal experience by the way. Traders that I know who have been around longer than 2 market phases are very adaptable. Ones that refuse to be honest with how the market phase is rewarding them are the ones now not trading.

Just saying

If your implying that the last 3 or 4 years was a great 'time' to average down, and i think that is what your saying, then i would have to agree...it certainly would not of worked (broadly speaking) in the 4 years that preceded it, 2005/6/7/8...in fact it would of been disastrous from a 2009/10/11/12 perspective, but in 2018 perhaps it wont.

I did 'step up in size' in late 2010 just as the market started to roll over, shocking timing that resulted in me getting stuck in about 7 trades, 4 of which in still stuck in...2 of them just coming good now.

 

[Trembling Hand]

If your implying that the last 3 or 4 years was a great 'time' to average down, and i think that is what your saying, then i would have to agree...it certainly would not of worked (broadly speaking) in the 4 years that preceded it, 2005/6/7/8...in fact it would of been disastrous from a 2009/10/11/12 perspective, but in 2018 perhaps it wont.

Yep thats what I'm saying. You have to be ever vigilant in how much of your success is due to just good/lucky timing. Pretty hard to do actually. Especially when you are being richly rewarded for a certain approach. There is a tendency to think you're hot **** and you'll be driving the Ferrari in a few years. Very hard to stop seeing the market in that same light that has been so good to you. I wasted all of 2010 when the bots locked up the futs markets after being in paradise form 2007 to late 2009. Hard to realise the golden goose is dead until its carcass is rotting.

I did 'step up in size' in late 2010 just as the market started to roll over, shocking timing that resulted in me getting stuck in about 7 trades, 4 of which in still stuck in...2 of them just coming good now.

Amazing how often that happens.

 

[burglar]

... Amazing how often that happens.

Happened to me, no don't feel sorry for me!
I had it coming, I was self-delusional !

It happened to my biggest holding
(No coincidence, ... in hindsight)

The biggest loss is not monetary!
It is time.

 

[sydboy007]

I suppose the question you need to ask yourself is why is th eprice on a downward trend.

If you a re a trader and less interested in fundamentals and more in the trend, then buying against the trend wont make you money.

If you intend to buy for the long term, not buy and forget, then you need to write down why you bought the company in the first place, and decide if those reasons are still valid.

I decided to take this course with my SMSF. Each investment I make lists a number of reasons as to why I bought the shares / bond etc. This will then hopefully help me to be far more rational should the market fall / take off. If I read anything I think relevant to my investment thesis I add this to my journal. I want to minimise my fear and greed.

In my personal investments I averaged down with BSA last year. I originally bought for the high yield - over 10% grossed up - and with their latest profit figures the share price was hit hard. On digging a bit deeper into the net profit fall I saw that it was due totally to the expiring of some tax credits they used to get. Actual revenue and profit was still increasing. My reason for investing was sound, though I now factored in that the payout ratio may be too high at 80%, but the share price fall meant that if the div ratio fell back to what it was before then the current price would offer me a similar grossed up div yield, so i bought a second tranche of shares. A few months later and the hunt for yield has provided me with a 15% capital gain, and I'll still make over 10% on my money.

Don't let your purchase price be an anchor.

 

[herzy]

Don't let your purchase price be an anchor.

This is exactly what it is about (or should be about) for fundamental investors - each time you 'average down' must be seen as a new investment decision: at these prices, is this a company I want to invest in?

If nothing fundamental has changed, the decision is easy for fundamental investors - they clearly thought it was a good buy before; now, it's a better buy...

A completely independent decision to your original purchase.

 

[burglar]

... now, it's a better buy...

I think you have mixed your metaphors!

To be completely independent, you cannot think it is now a better buy!

 

[Julia]

I think you have mixed your metaphors!

To be completely independent, you cannot think it is now a better buy!

Which metaphors?

 

[herzy]

I think you have mixed your metaphors!

To be completely independent, you cannot think it is now a better buy!

Sorry if I was unclear - of course something can be a better buy than it was previously, even if it is an independent purchase. If I see TLS today at 4.45, and remember the time I decided not to buy at 2.80, I can easily say 'Then was a better time to buy than now' - even if I buy now, it's still an independent decision.

Vice versa, if TLS drops tomorrow to 2.80, and I have an average buy price of 3.56 (having bought on the last dip), I can look at the decision and say - the fundamentals haven't changed, divvy just got better than my previous purchase price, and so now is a better buy than it was previously.

My decision to buy x TLS shares at 2.80 is still completely independent: although I happen to already hold (and hence am 'averaging down'), that is irrelevant - I would be purchasing TLS at 2.80 irrespective of my other holdings, due to divvy/future prospects/whatever else. In that sense, it is an independent (although better!) buy. Making a comparison between a current and previous purchase does not render my purchasing decision dependent on my previous decisions.

 

[herzy]

Which metaphors?

Also pertinent.