Dollar Averaging - Good or Bad?

[MichaelD]

"It's a good company, so..."

What will you do if SUN drops to $12? Sell, or buy more?

Buy more

And if it continues to slide to $11.50? Sell, or buy even more?

Buy more

And if it slips even furthur to $11, sell or buy even more still?

Buy more

$10?

Buy more

$9??

Buy more

$8???

See, now there's this bottom drawer in my desk...


(for humour impaired readers this is not to be taken seriously)

 

[peter2]

The bottom draw is another place where the SUN doesn't shine.

 

[zaz]

And what's your exit strategy if it all goes wrong? Do you have a stop loss?

What will you do if SUN drops to $12? Sell, or buy more?

And if it continues to slide to $11.50? Sell, or buy even more?

And if it slips even furthur to $11, sell or buy even more still?

$10?

$9??

$8???

If you a) view a stock as a part ownership in a business b) you value that business and c) it's selling for less than your valuation then any opportunity to buy it at an even bigger discount is fantastic. If there is a substantial drop all you can do is re-evaluate and if your assumptions haven't changed then just take advantage of the markets irrationality.

If you have a high degree of confidence in your valuation and the facts haven't changed then the answer at every price on the way down is buy more & buy even more. The only limiting factor is your degree of confidence in your valuation. "The market is there to serve you not inform you".

 

[tech/a]

If you a) view a stock as a part ownership in a business b) you value that business and c) it's selling for less than your valuation then any opportunity to buy it at an even bigger discount is fantastic. If there is a substantial drop all you can do is re-evaluate and if your assumptions haven't changed then just take advantage of the markets irrationality.

If you have a high degree of confidence in your valuation and the facts haven't changed then the answer at every price on the way down is buy more & buy even more. The only limiting factor is your degree of confidence in your valuation. "The market is there to serve you not inform you".

This unfortunately is a well healed view.

When the majority of "Owners" dont agree with YOUR valuation and the price continues to fall,insanity prevails with those who not only hold but buy more.
YOU rationalise your position and your pending loss (But its only a loss if i take it!!---wrong wrong wrong---go to a bank looking for a few bucks and tell them you have a share porfolio which initially held $200k of stock at purchase but now if liquidated is only $100k and see if they value your holdings as $200K!) by insisting that the market is irrational.
Holding--rational??? Buying More rational???
Pumping money into a belief of ones OWN valuation which is continually proven wrong---irrational---you bet.

If a stock drops 50% from purchase you must be a pretty poor valuer of a stock to get it that wrong.
Dont forget also that many of these holders who are selling ar no mum and dad investors. They are big money trades often in the millions in a few trades.
YOUR valuation is better than their's---really!

Cut your loss early then wait for all those irrational "Owners" to agree with your valuation that this stock is NOW Undervalued.
Go visit the NSL thraed where Y/T carried out some intense "Valuation" back in March May--its all there to read.
See what happens when all the owners agree with your analysis.
See the POWER of buying as a stock RISES not falls!

Rationalised---Irrational thinking stands a mile out!

 

[nizar]

Just a thought on the thread topic.

I have a mentor, and also somebody I consider a good friend, who invests for the very long term.

His portfolio now is quite substantial (my estimates tell me $3m+) and he encourages dollar cost averaging.
He is now in his 50s, and started his portfolio about 30 years ago.

What he did was buy "solid" bluechip companies and keep on buying them.
He put a certain % of his earnings into the same stocks every month -- but would buy a substantial parcel during corrections (He was a buyer of BHP the day after that 7% drop).

He admits to have taken a beating from his "solid" banking shares, but he isn't fussed. He "knows" that in the longterm that the portfolio will recover.

In fact, he says the market as a whole "has" to recover. "I mean, people aren't just gonna stop spending money?!" was the exact quote.

Now in my opinion the reasons why this method works for him is as follows:

*He has only ever invested in top200 companies, businesses he believes are likely to always remain profitable and are fundamentally sound (He holds BHP, CSL, MacBank, CBA, another top bank, etc).
Yeah I know there are and have been some dogs in the top200; eg. HIH, AMP, TLS. But compared to non-top200 stocks, there are less dogs (and consequently less champions).

*His portfolio value is probably about 15-20% of his net worth. He's not that fussed about day to day volatility as he has several income streams and his assets are diversified.

*He checks his portfolio only very occassionaly is prepared to hold for the very long term. This means less psychological stress during drawdowns.

Though I don't agree with his approach (my research shows more active trading is more profitable), it certainly has worked for him.

 

[tech/a]

Nizar

In the very longterm I do conceed---same applies to property.
However you need 2 things.

Very deep pockets and TIME.
What I cant understand is why people cant be smarter in getting on a longterm out performer.
IE If I buy 2000 @ $20 and 6 mths time its $10 I could have bought 4000
or been using my money more efficiently.
And why even an investor would watch shrugging his shoulders as his holding halves in value and consequently his capital.
IE sell at $20 then buy back 4000 at $10 if already holding at a profit.

Passive indifference!

 

[motorway]

Just a thought on the thread topic.

but would buy a substantial parcel during corrections (He was a buyer of BHP the day after that 7% drop).

.

http://invest-faq.com/cbc/strat-dol-val-avg.html

Sounds more like Value Averaging

motorway

 

[zaz]

This unfortunately is a well healed view.

When the majority of "Owners" dont agree with YOUR valuation and the price continues to fall,insanity prevails with those who not only hold but buy more.!

The price doesn't fall because of the majority of stock holders. It rises or falls based on the marginal holders. Those that are selling or buying right now set the price. It's incredibly rare that the majority of stock holders would be trading their stock at any given time (or generally even in any given year).

YOU rationalise your position and your pending loss (But its only a loss if i take it!!---wrong wrong wrong---go to a bank looking for a few bucks and tell them you have a share porfolio which initially held $200k of stock at purchase but now if liquidated is only $100k and see if they value your holdings as $200K!) by insisting that the market is irrational.
Holding--rational??? Buying More rational???

Price and value simply are not the same thing. The bank will only lend to me based on what they could sell stock for on the day. Well that's fine & reasonable because that's their business. Again it's no reflection on the value of the stock, simply on the price.

Pumping money into a belief of ones OWN valuation which is continually proven wrong---irrational---you bet.

If a stock drops 50% from purchase you must be a pretty poor valuer of a stock to get it that wrong.

A valuation defines what a company is worth. The marginal buyer and seller define the price. Just because a few people trading happen to agree a price it doesn't mean that the valuation is wrong. If a number of people decide to sell at once because they read some news article then the price may go down; the value of the company is based on their future cash flows. An estimate of future cash flows doesn't change on a daily or generally even on a monthly basis. Prices change by the second. They're just not the same thing.

Dont forget also that many of these holders who are selling ar no mum and dad investors. They are big money trades often in the millions in a few trades.
YOUR valuation is better than their's---really!

Often yes! Many of these "big money trades" do all sorts of silly things. They buy stocks at the end of quarters so they can report that they are holding whatever is popular (even if they didn't make any money on holding it). They sell when everyone else is selling because they don't want the Career Risk of holding an unpopular stock. They trade because they have a quarterly performance goal to reach. All of which has nothing to do with valuation. Some of them do analyze companies and value them. In which case maybe my valuation is better or maybe not. But as the price goes down my margin of safety increases not decreases.

Cut your loss early then wait for all those irrational "Owners" to agree with your valuation that this stock is NOW Undervalued.
Go visit the NSL thraed where Y/T carried out some intense "Valuation" back in March May--its all there to read.
See what happens when all the owners agree with your analysis.
See the POWER of buying as a stock RISES not falls!

Rationalised---Irrational thinking stands a mile out!

There are plenty of us making plenty of money buying part ownerships in business and buying more and more as the market offers us a better and better deal.

I'm replying for those reading who may be trying to make their mind up. I'm pretty sure yours is already made up!

 

[tech/a]

I'm replying for those reading who may be trying to make their mind up. I'm pretty sure yours is already made up!

True to a larger extent it is.
Ive seen many fail using this method you see them come and go here all the time.
Similar to the Martingale gambler at the Roulette wheel.
However I agree that long term holding of good stock can give high return in the long run.
Those with a short term view even 5 yrs may find it difficult to increase their capital using the Averaging down method,particularly in a non trending market as we have here and likely to have for sometime (Relative to the last 10 yrs).

There was an exercise which lasted 2 yrs where ducati (a poster here) attempted to prove to me that value buying could out perform or at least match my long running Trading method shown next door ( On "the Chartist forum") Its been going now 6 yrs.
However after 2 yrs without averaging down it was way way behind,during one of the most bullish periods.

If someone would like to run a like demo averaging down Id be happy to be proven wrong.
Evidently there are some very undervalued stock at the moment during this "Correction"

ZAZ?

There are plenty of us making plenty of money buying part ownerships in business and buying more and more as the market offers us a better and better deal.

I see a vast difference in Averaging down to buying a good performing stock on pullbacks within a trend.
As an example buying ZFX from the $20s down.
But then again I suppose you'll tell me ZFX was never valued at more than $10---

 

[So_Cynical]

And what's your exit strategy if it all goes wrong? Do you have a stop loss?

What will you do if SUN drops to $12? Sell, or buy more?

And if it continues to slide to $11.50? Sell, or buy even more?

And if it slips even furthur to $11, sell or buy even more still?

$10?

$9??

$8???

Yes the SP can fall...but look at the chart, it goes up to...in time.

I'm not in a hurry and have no time pressure...ill hold till it comes good, because it will come good.

TOL is looking great value.

 

[AlterEgo]

Yes the SP can fall...but look at the chart, it goes up to...in time.

That's called HOPE. Maybe it will, maybe it won't. You can't possibly know that for sure. Maybe it's down in price because the "insiders" know something that you don't. Perhaps it has some sub-prime exposure that isn't widely known yet. Or could be down because of some other reason. The fact is that you don't know WHY it is down in price, and by the time you eventually find out it'll be too late. Selling at a SMALL initial loss is like taking out 'insurance'. It's insurance against the possibility that you may be wrong. You can always buy it back at a later date, or lower price, later on, when the trend is UP.

I'm not in a hurry and have no time pressure...ill hold till it comes good, because it will come good.

It MAY come good, and even if it does, how long will it that take? 6 months? 6 years??? To hold some stock (which would represent a SUBSTANTIAL part of your portfolio since you kept buying more and more as it fell) for several years just to eventually break even or make a slight profit is just madness!

You mention TIME pressure. IMHO TIME is a VERY important factor that many overlook. It's not what percent profit you make that's important, it's what percent profit you make PER UNIT OF TIME that matters, ie. %PA. eg. a 20% gain on a stock may be a great return if you got it in 2 months, but it'd be a very poor return if it took 10 years to get that profit.

 

[vishalt]

It really depends on what you are dollar cost averaging.

If you bought BHP at $48, then averaged at $40 and $32, and the stock went to $50 etc you'd be pretty happy?

If you're doing with a speculative stock or a smaller stock who's balance sheet is getting trapped or something is seriously wrong, you're gone.

I never dollar cost average with anything I'm not sure with.

I'm using this technique for Westpac/Woolworths/ASX but not smaller shares like SP Ausnet, Beach Petroleum or AWE.

I also think its the best strategy for funds and indexed ETFs like SPDR200/50, the index CANNOT collapse. However just make sure you keep an eye out on the State Street to see nothing is wrong with them lol.

I mean if you dollar cost averaged the S&P500 at its 2000 peak at 1500 or whatever as it went down to 750, you'd be making money today.

Whereis if all you did was hold onto the one parcel you bought, you wouldve borken even just last year when the US market made record highs, and now you'd be in the ****ter again.

Good stocks/indexes = dollar cost average (BHP/Woolworths/CommBank/Westpac/SPDR200)
Bad stocks or stocks you're starting to get unsure off = nono (BabcockBrown/Macquarie/Challenger etc)

 

[Trembling Hand]

Averaging down seems like a way to either break sensible money management rules OR/AND a way to miss a killing on your winners while loading up on losers.

If your tactic is to get in at full size on first purchase and it drops you are adding even more and more, making a loser a a huge holding probably to big. The other thing you could do is make a partial purchase first but what then if it starts to run hard You have a winner but only a tiny position. If you wait to average down you will never get it again and if it keeps running its hardly going to pay you much because you are holding a tiny amount.

 

[AlterEgo]

Well I've never traded an index, but I can see that could work with averaging down. I'd never do it with a single stock though. Many supposed 'blue chips' have gone bust over the years, and the reason behind the falling stock price generally hasn't become public knowledge until it's ceased trading, ie. too late to sell. Generally when a stock falls substantially in price, there is a very good underlying reason for the fall. Just because YOU don't know of the reason, doesn't mean that a reason doesn't exist. You or I can't know the company anywhere near as well as the company directors for example. We are not Warren Buffett. Many insiders may be privy to information that we don't know about.

 

[So_Cynical]

Many supposed 'blue chips' have gone bust over the years, and the reason behind the falling stock price generally hasn't become public knowledge until it's ceased trading, ie. too late to sell.

As a percentage how many...im guessing less than 3% per year average go bust...leaving us
with 97% continuing, stable, well run company's.

Generally when a stock falls substantially in price, there is a very good underlying reason for the fall. Just because YOU don't know of the reason, doesn't mean that a reason doesn't exist. You or I can't know the company anywhere near as well as the company directors for example.

Depends what u call substantial...in my experience stocks go up and down all the time on
mostly nothing...in fact most of the movements, in most stocks are on nothing.

Don't over estimate the company exec.....i don't.

The market decides what XYZ is worth on any given day, the challenge is to use
that to your advantage...with some luck ill get some buy orders filled tomorrow.

 

[tech/a]

The market decides what XYZ is worth on any given day,

Sorry I dont understand.
I thought "The Market" was irrational.
So your saying EVERYDAY the market irrationally values a company while the Fundamental analysts rationally values and buys more when under his valuation.

So these irrational components of the market---their valuation of the stock they entered and or sold is different---irrationally so---than yours or anyone elses which is lower than yours.

Whos valuation is correct?
Yours or day to day market participants---witth their valuation if still low 1,3,6,mths down the track still be in correct?---according to the buyer who is still averaging down.

 

[MichaelD]

Whos valuation is correct?

Doesn't matter so long as your trading method allows winners to run sufficiently to make up for the losers.

As you well know, it ain't the analysis that makes the money, it's the trade management after entry that makes the money.

 

[cuttlefish]

The more I read these debates the more pointless they seem. Short term its predominately psychology that dictates the direction of stock prices, longer term its value.

Stock valuation is relative - i.e. 'value' only exists in a context - a stock might show value compared to its sector peers, or to the market as a whole, or to other investment classes (bonds, cash, property).

Valuation also takes place in a macro economic context so it is also affected by changes in commodity prices etc.

Therefore value is also quite dynamic - in reality it is as dynamic as price but nobody really assesses it that way.

True value is bankable - therefore the only true value stocks are those that generate an income now that greatly exceeds the income available from other asset classes and that are highly likely to continue to generate the same or better income in the coming years based on the company factors and current and likely future macro economic factors.

Thus, for example, a stock that is solely a Zinc producer is changing in value as the Zn price outlook changes. Its true value - i.e. the income its generating - is going to fall as the Zinc price falls. Whether someone decides to average down or cut their losses would be based on their outlook for Zinc prices but the simple view I would take is that the immediate reality is that their income is going to fall so were I a holder of a Zinc producer I would have been reducing or exiting the holding as Zinc prices fell.

(unless of course their production levels were going to increase to counter it, or they had a new development coming on stream that would counter and exceed it, or they'd identified significant cost savings etc. etc. but you get the general picture.)

(And note this is not a comment specifically on ZFX that was mentioned somewhere above as I haven't done any kind of assessment on ZFX and don't know the stock in any detail).

 

[AlterEgo]

As a percentage how many...im guessing less than 3% per year average go bust...

I haven’t counted them, but it’d be a minority. That’s not the point though. If you started your portfolio by dividing your money equally between say 10 different stocks. Then kept buying more and more of one of them as it fell – so now it represents 30% of your initial capital instead of the original 10%. If it goes bust, or never recovers, you’ve now lost 30% of your portfolio. How many years will it take you to recover from that?!

Now consider applying a stop-loss. You’d have only lost 1% of your total capital instead of 30%. It’s a lot easier to recover from a 1% loss than a 30% one. To recover from a 30% loss you need to make a 43% gain. How likely is it that you’ll be likely to achieve that?!

The stock going bust is the worst case scenario I agree. A much more likely possibility is that the stock continues to fall much further than you expected it to, and takes much longer to recover than you expect, dragging down your overall portfolio performance with it. You will never out perform the market in the long term by applying this approach. I suspect you’d receive a better return with your money in a high interest savings account.

 

[tech/a]

Doesn't matter so long as your trading method allows winners to run sufficiently to make up for the losers.

As you well know, it ain't the analysis that makes the money, it's the trade management after entry that makes the money.

Well Michael I cant see Dollar Averaging---averaging down as sound M/M.

Someone mentioned TOL.

I'm no fundamentalist but they believe that the company is getting close to good buying.
Past history may well give them this impression.
Currently its tanking---Fuel costs,Drop in demand.This is going to effect the bottomline that which the analysis is based upon.

In 12 mths time as youve been averaging down the stock could well--due to economic factors beyond its control---be valued way under your initial valuation---then what youve bought all the way down to a level which is NOW true value.

The market know this and as such the price tanked well before the fundamentals showed the altered value in the balance sheet.

Which takes care of Cuttlefishes --this is a rediculous arguement.
I agree its is just as stupid as averaging down.

But prove me wrong people.