Averaging down

[port]

I hold a stock which I consider to be undervalued. It has become more undervalued recently.

Target to spend $y to average down. Calculations show my cost per share will drop 7.5% after averaging down.

over past 10 yrs, 
average capex/depreciation~1.8
trading at 3x average FCF & 0.3x peak FCF
EV/mean FCF= 19
EV/peak FCF= 2.5

comments appreciated.

[LionFlyer]

You should state the stock. People here are not really interested in replying without knowing.

edit:
Since you claimed to have bought it and you are going to average down... what do you hope to achieve by posting your question? Some form of validation? How can someone validate your claims without any details? 

Without understanding the business, industry, the stats themselves doesn't tell the whole story. Why is it undervalued is not explained (and it will have to be benched marked against the peers) either. Do you have at least an investment thesis?

[CY09]

Hi Port, this is the third time in recent times you have done this - not stating the company name and mermely giving an introduction on its financials for interest in the counter. Therefore, A warning is issued to you, along with a three day cool down on posting.

Please post what you have typed above and intended to type in the company thread itself after the three day cool down. For example, you managed to find the thread "Atlantic Navigation" and posted your reply there. If the company you are introducing above is new and does not have a thread, please create one along with the name of the company.

<Moderator>

[Retired@52]

Hi Port, this is the third time in recent times you have done this - not stating the company name and mermely giving an introduction on its financials for interest in the counter. Therefore, A warning is issued to you, along with a three day cool down on posting.

Please post what you have typed above and intended to type in the company thread itself after the three day cool down. For example, you managed to find the thread "Atlantic Navigation" and posted your reply there. If the company you are introducing above is new and does not have a thread, please create one along with the name of the company.

<Moderator>

Hi CY09,

I think "Port" is not trying to discuss about a company specific. His title is "Averaging down". I think he is trying to discuss with "Value Buddies" on what to do when one is caught in such a situation like what he described.

My sharing with him will be: Averaging down is dangerous as we do not know how low the price of that stock can fall. I prefer to wait until it bottoms then when we see sign of it moving up then I will do the "Averaging up". In averaging up, one needs patience to wait for that "Value Stock" to bottom out.

[dydx]

Assuming you have decided and are comfortable in increasing the size of your holding of a particular stock, taking advantage of the prevailing lower prices offered by Mr Market by averaging down is actually a smart thing to do - as it helps you to achieve a lower average cost of your planned stock holding position. It is never easy to buy stocks and more shares in a falling or uncertain market, but most seasoned investors have gotten used to it. The point to bear in mind is that if the stock market is at a normal or buoyant state, you probably cannot expect to buy stocks at the current marked down prices. Having said that, it is equally and perhaps even more important to choose your stocks and their underlying businesses well to minimise the risk of a business failure.

[weijian]

Hi Port, this is the third time in recent times you have done this - not stating the company name and mermely giving an introduction on its financials for interest in the counter. Therefore, A warning is issued to you, along with a three day cool down on posting.

Please post what you have typed above and intended to type in the company thread itself after the three day cool down. For example, you managed to find the thread "Atlantic Navigation" and posted your reply there. If the company you are introducing above is new and does not have a thread, please create one along with the name of the company.

<Moderator>

Hi CY09,

I think "Port" is not trying to discuss about a company specific. His title is "Averaging down". I think he is trying to discuss with "Value Buddies" on what to do when one is caught in such a situation like what he described.

My sharing with him will be: Averaging down is dangerous as we do not know how low the price of that stock can fall. I prefer to wait until it bottoms then when we see sign of it moving up then I will do the "Averaging up". In averaging up, one needs patience to wait for that "Value Stock" to bottom out.

Hi retired52,
It is not exactly easy for Moderators to give the benefit of the doubt, if you have done it twice. VBs would actually appreciate if "Port" could post his thoughts about averaging down in the company specific thread as it gives everyone more context. It could even spark more discussion (non averaging down related). It is a bit oxymoron to post a thread with a general topic and subsequently put in specific numbers.

Thanks for your thoughts (and that of dydx). Golden advice in current times.

Moderator

[BRT]

i am a fan of averaging down, if theres such a thing. most of my decent money has been made only because i averaged down, since i never have perfect timing. its also the basis of dollar cost averaging. whenever i buy i dont hope to have to average down, but i bear that in mind that uncertainty is everywhere n should the unfortunate/fortunate opportunity come where im presented with the option to average down, if i find my thesis still intact, i grudgingly do so. with hindsight that has worked out well on more occasions than not.

[Retired@52]

Dear Value Buddies,

In Dollar-Cost-Averaging, one can buy on the way down or on the way up.
I fear Averaging down, I prefer Averaging up. See my two actual examples below.

Averaging Down:
I bought a valued stock, “STX OSV”, later they changed the name to “Vard Hldgs”
24th March 2012. I bought it at $1.71. It went down all the way so I did the “Average-Down” all the way.
05th October 2016. I made the last purchase. My average price became $$0.774
I dared not buy anymore, it went further down.
The company took it private and paid me $0.25 per share on 28th March 2018
I lost a small fortune on this stock.

Averaging Up:
20th July 2009, I bought “Fraser Commercial Trust at $0.216 per share.
I did “Average-Up” all the way.  
13th Oct 2011, I did my last purchase.
29th January 2020, the dividends I collected already covered my cost. Looking at the COVID-19, I decided to sell it off at $1.64 per share. I made a small fortune on this one.

[specuvestor]

It depends on your style and purpose

Traders especially on weekly PnL or on margins, never should average down

Value investors, unless you believe in momentum investing, ought not to average up

[karlmarx]

When you average down, you are implying that your earlier investment decision was correct.

When you don't average down, you are implying that your earlier investment decision might be wrong.

If you're not sufficiently introspective, you may have a higher likelihood of making the first choice. Few people enjoy questioning and doubting their earlier decisions.

I think the 'correct answer' of whether to average down or not has already been given.

Every time you put money down -- whether for the first time or average down/up -- you should re-think the entire thesis, and also consider if there might be something better out there.