Averaging Down

When the facts change, I change my mind. What do you do, sir?

If one is considering buying more after the share price of your stock fell, just don't think in terms of "averaging down". It reveals a flaw in the thought process as reference is still being made to the earlier buy price.

Many great investors(WB, John Templeton, etc) recommend to buy very strongly(a lot) in a Bear market's fire-sale. i wonder is it O. K. to average down the price of the stock you are interested during this time? Where the PE & Div. yield number go haywire. Me too. At this time how to value the stock? Anyone, any view to share? Thanks.

(18-07-2011, 08:41 AM)Temperament Wrote: i wonder is it O. K. to average down the price of the stock you are interested during this time? Where the PE & Div. yield number go haywire.

Hi T-san,

I think your first question has been answered in the first couple of posts- in short, if the characteristics of the industry and the business has not changed fundamentally, then why not buy more since it's akin to getting the same thing at a cheaper price.

To illustrate, imagine if you love Ferraris for their quality and now you're able to buy them at 1/2 price, would you buy more? If you know that they haven't compromised on the quality of their cars (lousier materials, shoddy workmanship) and usually over an extremely short period, it's more likely they are clearing existing inventory rather than cutting corners like that, you would right?

As for your second question, my personal opinion is to use a N-year average P/E. I use 10 years where I can and as many as possible where it's less than 10. This irons out a lot of cyclicality.

I've used Shiller's CAPE P/E and if you compare it against the S&P, it tracks the peaks and troughs very nicely. I tried to do that for the STI but I can't find that much data to work with (only until 1993 ).

Having said all this, the first part is most important. You have to be able to tell if your stock is facing a fundamental changes in the industry or operations before even thinking about anything else.

If you're a trader or looking at very short term movements, then please disregard all of the above.

"Don’t gamble; take all your savings and buy some good stock and
hold it till it goes up, then sell it. If it don’t go up, don’t buy it." -- Will Rogers

(18-07-2011, 09:31 AM)kazukirai Wrote:

(18-07-2011, 08:41 AM)Temperament Wrote: i wonder is it O. K. to average down the price of the stock you are interested during this time? Where the PE & Div. yield number go haywire.

Hi T-san,

I think your first question has been answered in the first couple of posts- in short, if the characteristics of the industry and the business has not changed fundamentally, then why not buy more since it's akin to getting the same thing at a cheaper price.

To illustrate, imagine if you love Ferraris for their quality and now you're able to buy them at 1/2 price, would you buy more? If you know that they haven't compromised on the quality of their cars (lousier materials, shoddy workmanship) and usually over an extremely short period, it's more likely they are clearing existing inventory rather than cutting corners like that, you would right?

As for your second question, my personal opinion is to use a N-year average P/E. I use 10 years where I can and as many as possible where it's less than 10. This irons out a lot of cyclicality.

I've used Shiller's CAPE P/E and if you compare it against the S&P, it tracks the peaks and troughs very nicely. I tried to do that for the STI but I can't find that much data to work with (only until 1993 ).

Having said all this, the first part is most important. You have to be able to tell if your stock is facing a fundamental changes in the industry or operations before even thinking about anything else.

If you're a trader or looking at very short term movements, then please disregard all of the above.

Do you know where to find the CAPE P/E for the STI?

(18-07-2011, 10:45 PM)redcorolla95 Wrote: Do you know where to find the CAPE P/E for the STI?

I've only found the monthly P/E for the STI back to 1993 from this site (process driven trading) Click on the link titled 'Monthly' in the 'Valuation Index (Ratio)' row of the table and it'll DL the data in .xls format.

Using the data in there (STI close and P/E), you can calculate the Earnings level for each month and then take a 10 year average. With that you can work out a 10 yr PE. I'm not sure if this is exactly the same as Shiller's CAPE but it does a much better job than p/e when you overlay it on the STI.

Hope this helps.

(18-07-2011, 09:31 AM)kazukirai Wrote:

(18-07-2011, 08:41 AM)Temperament Wrote: i wonder is it O. K. to average down the price of the stock you are interested during this time? Where the PE & Div. yield number go haywire.

Hi T-san,

I think your first question has been answered in the first couple of posts- in short, if the characteristics of the industry and the business has not changed fundamentally, then why not buy more since it's akin to getting the same thing at a cheaper price.

To illustrate, imagine if you love Ferraris for their quality and now you're able to buy them at 1/2 price, would you buy more? If you know that they haven't compromised on the quality of their cars (lousier materials, shoddy workmanship) and usually over an extremely short period, it's more likely they are clearing existing inventory rather than cutting corners like that, you would right?

As for your second question, my personal opinion is to use a N-year average P/E. I use 10 years where I can and as many as possible where it's less than 10. This irons out a lot of cyclicality.

I've used Shiller's CAPE P/E and if you compare it against the S&P, it tracks the peaks and troughs very nicely. I tried to do that for the STI but I can't find that much data to work with (only until 1993 ).

Having said all this, the first part is most important. You have to be able to tell if your stock is facing a fundamental changes in the industry or operations before even thinking about anything else.

If you're a trader or looking at very short term movements, then please disregard all of the above.

Hi,
In normal time it's already not easy to be sure of a stock's fundamental and operational conditions, so in turbulent time (market crash) it's even much more harder. What! with all the rumours, fears and panic spreading everywhere can we remain steady and calm? Like the recent 2008/2009 market crash, i think you really need to have a strong heart & stomach to buy. And of course a strong faith that though now the markets of the world were running away, they always would come back eventually. i think this market cycle caught most people by surprise - how fast and deep the markets run away and also how fast & steep the markets came running back. i am definitely one of them. i think all types of investors are affected by market's extreme behaviour. Nobody can escape. But this was the time, where professional traders rubbing their stomach with laughter; shorting shares & laughing all the way to the banks. But who were the buyers? i think some of us were. i definitely were - thinking the shares were so cheap now but they got cheaper & cheaper until i got no more moolah to buy. This is Pyramid Down of averaging the price of a stock.

i think i will use "Pyramid Up"(average up like a pyramid) buying rather then average down for the next bear market, in order not to catch the proverbial falling knife. It's safer and gives better average price of a stock. The problem is at what point of the bear market i should start? Or how i should pick my starting point to pyramid up.
All comments are welcome.

Still the same old saying........invest during recession.........

But I think none of my frenz are doing that LOLZ, they always give me a weird look and then question me eg, when e next recession etc......

Everything is dirt cheap........still remember the 2009-2010 days where dividends is rolling in big time, capital gains kao kao.......

My frenz invest now, STI flat for the entire year also......where gt profitable????

I dont want to comment too much, because another 10-15% run-up is approaching.....however, its nothing compared to recession investing =)

Have to be patient... recession comes, grab blue-chips 1st, they recover faster, after that move the gains to small-cap counters to ride the uptrend..

pyramid up during an uptrend feels better!