Averaging down experience

[skc]

The most serious mistake people make on average down is they throw risk management out of the window. And with value / fundamental investmenting, the key to risk management is position size.

Even if you average down for the right reason, you still need to make sure it is within your position size parameters. And the position size must be considered as capital deployed (not capital realisable after the original parcel has fallen 25%).

The problem with this approach is that it means your original parcel is not full size. If the position goes up for you without ever looking back, your probfits are lower than otherwise if you simply put on the full size.

An extreme example of bad averaging down:
I read a sad story on another forum about how one "investor" who's mid 40s (or something like that) with the only asset in his name to be Lynas shares bought at $2+. I can't remember what his "average price" was, and LYC may or may not ever come back... but regardless you simply never want to put yourself in such a situation.

 

[odds-on]

The most serious mistake people make on average down is they throw risk management out of the window. And with value / fundamental investmenting, the key to risk management is position size.

Even if you average down for the right reason, you still need to make sure it is within your position size parameters. And the position size must be considered as capital deployed (not capital realisable after the original parcel has fallen 25%).

The problem with this approach is that it means your original parcel is not full size. If the position goes up for you without ever looking back, your probfits are lower than otherwise if you simply put on the full size.

An extreme example of bad averaging down:
I read a sad story on another forum about how one "investor" who's mid 40s (or something like that) with the only asset in his name to be Lynas shares bought at $2+. I can't remember what his "average price" was, and LYC may or may not ever come back... but regardless you simply never want to put yourself in such a situation.

Hi Skc (and anybody else),

In your experience trading on the ASX, do you think there have been many opportunities to go “all in” on a position? Not necessarily put ALL your money into the position but say 50% of your net worth. The reason I ask is that many of the successful businessmen I have read about it became successful due to very concentrated positions in stocks or businesses. Why bother putting 0.2% of your net worth at risk when the game is to make money?..I can think of two international shares I am still kicking myself for not taking a position.....the wise monkey on my shoulder was screaming at me to buy....and I did not...

I personally do not have a problem with averaging down on selected positions (e.g. long term core portfolio large cap dividend paying companies)

Cheers

Oddson

 

[skc]

Hi Skc (and anybody else),

In your experience trading on the ASX, do you think there have been many opportunities to go “all in” on a position? Not necessarily put ALL your money into the position but say 50% of your net worth. The reason I ask is that many of the successful businessmen I have read about it became successful due to very concentrated positions in stocks or businesses. Why bother putting 0.2% of your net worth at risk when the game is to make money?..I can think of two international shares I am still kicking myself for not taking a position.....the wise monkey on my shoulder was screaming at me to buy....and I did not...

I personally do not have a problem with averaging down on selected positions (e.g. long term core portfolio large cap dividend paying companies)

Cheers

Oddson

Never. If I am running my own business and I have control over what happens... then sure go in big as that's the only way to make it work.

But we are talking about listed companies here. There are simply things that you don't have full knowledge of including crazy things from the left field (like the entire board being killed by a plane crash). I do not want to be in a position that increases the chance for my net worth to be decimated by bad luck...

The average investor feels the need to go all in because they don't see enough opportunities. But as you get more experienced in the market, chances are opportunities appear think and fast and you are more likely to struggle to catch them all, as opposed to worry about when the next one will come along.

 

[tech/a]

Hi Skc (and anybody else),

In your experience trading on the ASX, do you think there have been many opportunities to go “all in” on a position? Not necessarily put ALL your money into the position but say 50% of your net worth. The reason I ask is that many of the successful businessmen I have read about it became successful due to very concentrated positions in stocks or businesses. Why bother putting 0.2% of your net worth at risk when the game is to make money?..I can think of two international shares I am still kicking myself for not taking a position.....the wise monkey on my shoulder was screaming at me to buy....and I did not...

I personally do not have a problem with averaging down on selected positions (e.g. long term core portfolio large cap dividend paying companies)

Cheers

Oddson

Actually I agree 100 %

but NOT averaging down into a position and not exposing yourself to catastrophic risk.

 

[McLovin]

The average investor feels the need to go all in because they don't see enough opportunities. But as you get more experienced in the market, chances are opportunities appear think and fast and you are more likely to struggle to catch them all, as opposed to worry about when the next one will come along.

Yes. I have 19 stocks at the moment. I try and limit myself to 20, but in the last few weeks I've found a few new stocks worth looking at. There's opportunity out there you just need to dig, dig, dig.

There's also the tendency when you start out to find a great company and think wow, this is going to make me a fortune and then think well if I put in $x I'll make nice money but if I put in x+y it will change my life when it goes up. Leverage seems to be seen the same way.

 

[tech/a]

Yes. I have 19 stocks at the moment. I try and limit myself to 20, but in the last few weeks I've found a few new stocks worth looking at. There's opportunity out there you just need to dig, dig, dig.

There's also the tendency when you start out to find a great company and think wow, this is going to make me a fortune and then think well if I put in $x I'll make nice money but if I put in x+y it will change my life when it goes up. Leverage seems to be seen the same way.

You only have to get it right once to alter your life perminently.

Caveat :- but NOT averaging down into a position and not exposing yourself to catastrophic risk.

 

[McLovin]

You only have to get it right once to alter your life perminently.

Caveat :- but NOT averaging down into a position and not exposing yourself to catastrophic risk.

Sure but I'd hazard that for a newbie investing or trading something that turns out to be life changing will come down to pot luck rather than any great insight. I'd say this holds for even experienced traders/investors. Compounding returns is a far better way to increase wealth than going for one big hit; Don Bradman only hit six 6's in his entire career but his average is almost double the next nearest.

 

[tech/a]

Sure but I'd hazard that for a newbie investing or trading something that turns out to be life changing will come down to pot luck rather than any great insight. I'd say this holds for even experienced traders/investors. Compounding returns is a far better way to increase wealth than going for one big hit; Don Bradman only hit six 6's in his entire career but his average is almost double the next nearest.

Yes I agree my thinking was along the exact same lines. (not one shot but compounding) One strong Bullrun would do it like 2001-2008
Or one crash like 2008/9 Short the index with enough even 10 contracts would be massive.

Each can be seen but you cant be sure exactly on timing.
You can average into them as its clear that the "luck" is in your favor.
How massive that luck is only time tells.

But if you put yourself in front of luck often enough youll find it.
Others will just think your lucky.

 

[odds-on]

I do not worry about whether the next one will come along, I do worry about how many I can accurately assess over the course of my lifetime. Fair enough if you think are the investing version of a Don Bradman, some people are not, most are probably the investing version of the fat kid who goal hangs during lunchtime soccer.

 

[McLovin]

I do not worry about whether the next one will come along, I do worry about how many I can accurately assess over the course of my lifetime. Fair enough if you think are the investing version of a Don Bradman, some people are not, most are probably the investing version of the fat kid who goal hangs during lunchtime soccer.

I don't think I'm Don Bradman, I just think it's easier to let things compound than try and pick a single big winner. Most value investors seem to think the same (Schloss, Buffett, Marks etc). Of course on the other side of the coin there's Phil "you only need one Motorola in your life" Fisher.

Compounding really is a wonderful thing.

 

[RottenValue]

But if you put yourself in front of luck often enough youll find it.
Others will just think your lucky.

This one I do like, good to see that a TA and FA can agree very occasionally

 

[burglar]

Hi Julia,
I just had to check if we were in the beginners lounge.
I'm incredulous, speechless even!!





Deep breath, here goes ...

a.) I'm a happy-go-lucky creature. Check my avatar!

b.) It's called "portfolio heat", if I remember correctly!
I did try to express it in words most people will understand.

c.) Averaging down is inherently dangerous.
Boggo explains it so much better!

This must be a really good topic!

Despite everything I posted here,
I have tried 'averaging down' again!


Mixed results, I'm afraid.

 

[So_Cynical]

I have probably averaged down in 80% of the stocks i have bought and come out with profit 90% of the time.

No leverage, Being prepared to wait and not getting carried away are key ingredients to successful averaging...and you have to be brave without being stupid.

 

[nulla nulla]

I have probably averaged down in 80% of the stocks i have bought and come out with profit 90% of the time.

No leverage, Being prepared to wait and not getting carried away are key ingredients to successful averaging...and you have to be brave without being stupid.

Many years ago, I averaged down with AMP. Eventually I capitulated, having lost faith, and sold. I lost a bundle. AMP has never recovered to my initial entry levels but has lifted and fallen enough times over the last four years for me to recover my funds by buying on the dips and selling on the highs. Having recovered our funds, we have moved on from AMP. If I average down now, it is only in those shares where the spread can be measured in cents not dollars and the volumes traded can support a recovery/profit.

 

[burglar]

I have probably averaged down in 80% of the stocks i have bought and come out with profit 90% of the time.

No leverage, Being prepared to wait and not getting carried away are key ingredients to successful averaging...and you have to be brave without being stupid.

I have been brave, ... but now, I have to be patient too?

 

[So_Cynical]

I have been brave, ... but now, I have to be patient too?

Miners? and Mining services? its gona take a long time to turn around.

 

[joku]

In 2006 - 2009 I underperformed the accum index somewhat significantly. My averaging down experience in this time was very bad.

In 2010 - 2013 I outperformed the accum index very significantly. My averaging down experience in this time was good.

I think averaging down has a tendency to reflect general investment ability, but with a dangerous extra dose of emotion thrown into the mix. I think med/long term investors are largely doing themselves a disservice though by making too much of a fuss about averaging down. You should veru much respect the emotional baggage issues presented but otherwise averaging down is neither here nor there and only distracts from real underlying issues of what went right/wrong.

 

[burglar]

Miners? and Mining services? its gona take a long time to turn around.

I suggest mid January - end February 2014!

Is that sufficient patience?

 

[burglar]

Miners? and Mining services? its gona take a long time to turn around.

FCN ... Payday?

 

[Trav.]

I found this old thread after struggling with my average down addiction. Some great discussion and varied opinions. Things I will be focusing on initially

- better risk management - Set max loss % and stick to it. (maybe 20% on spec stocks)
- better timing on entry - Research more thoroughly and don't get sucked in with the hype

Still learning but overcoming my own short comings is proving more difficult than first thought.

Cheers