Averaging Down

[bb88]

I have been told that averaging down is ALWAYS a bad move. True? Do you agree?

I am guessing this could be a TA-ish principle. If you average down, it means the stock is on the downtrend and you're only buying more into your own loss. Most TA people also subscribe to the mantra "Buy high, sell higher" which is the opposite of averaging down.

Somewhere in me I think the context is important. Using a scenario, if I believe that say SIA is a good share to hold and I missed the good price but the current price of $14.20 is still fair, I can enter. Then when the price goes to say $14, and my assessment of SIA remains, I would likely consider buying more. This is in effect averaging down but is to increase my stake and improve my position on a still good counter.

This is different from averaging down when a counter slide in order to minimise the loss and rise needed to breakeven earlier mistake.

Any views?

[arthur]

My opinion is that it depends.

To me, it depends on two criterias.
1. What is the state of world economy?
2. Has the fundamental of the stock been shaken?

Ever know someone who avg down Citi from $50 to $1?
I do.

Plain silliness.

Cheers

[Musicwhiz]

Any views?

Assess the Company to see if the business is still holding strong and whether it can continue to generate good cash flows and profits. If yes, then averaging down makes sense; if not then you should actually consider divesting.

I've done averaging down quite frequently, all the way from 2008 (for Boustead, Tat Hong) to 2011 (for SIA Engineering). Thus far, I have not regretted my decision.

[violinist]

Those who said no to averaging down are mostly taking it from a trading point of view. Generally, traders take a shorter view time frame for achieving a certain return. So naturally, averaging down is not advisable. But if you have a longer holding period, averaging down is just viewed as another chance to buy at a cheaper price. The reason my portfolio is positive now is largely due to averaging down during 2008-2009. Having said that, what to buy is another issue altogether.

[Bibi]

I do Pyramid averaging down. I.e the more it drop the more I will buy. I don't do this when the economy is strong unless the event affecting the company is one off. Only do it when economy risk going into recession.

[mrEngineer]

One point on averaging down is despite long term or short term view, you may not know better than the insiders as retail shareholders.

From my company, I can see how often we share information with analysts which are not ultimately available in the public domain as fast as we hope the public would know.

Unless you are 200% sure (double confirm) that you know that market has priced the security wrongly, then you should average down. For many small investors, our capital are limited and we have to also consider about the opportunity costs of not average down and investing into another security.

Thus far, I have regretted on all my average down stocks as I could say that I do not know them well enough.

[Nick]

I have rarely had a good ending with any of the stocks I averaged down. Most kept sinking or stagnated away. On the contrary, I usually have a good ending with stocks I averaged up. I guess it is human nature to be stubborn and believe our analysis is right and the entire market is wrong. If a stock falls significantly compared to the market trend, there is usually a good reason why - the outlook may not be as rosy as we think, there are events occurring which we are not aware of, poor results etc. I guess it makes better sense to cut loss instead of averaging down only to be proven wrong later when the terrible news are out ! If the whole market is plunging and your good stock also fall, then that is a different story - averaging down might be a golden opportunity. I guess there is no hard and fast rule for this.

[Musicwhiz]

I have rarely had a good ending with any of the stocks I averaged down. Most kept sinking or stagnated away. On the contrary, I usually have a good ending with stocks I averaged up. I guess it is human nature to be stubborn and believe our analysis is right and the entire market is wrong. If a stock falls significantly compared to the market trend, there is usually a good reason why - the outlook may not be as rosy as we think, there are events occurring which we are not aware of, poor results etc. I guess it makes better sense to cut loss instead of averaging down only to be proven wrong later when the terrible news are out ! If the whole market is plunging and your good stock also fall, then that is a different story - averaging down might be a golden opportunity. I guess there is no hard and fast rule for this.

Hi Nick (and also to MrEngineer),

I guess the averaging down strategy must be applied over a period of time (i.e. years) for it to be effective, as one can then go through the experience of a full bull/bear cycle and to assess if a business is indeed worth purchasing. I personally feel that there is too much emphasis on share price and "whether the share price decline is in line with the market decline" - this will inadvertently result in bias as one always anchors the share price decline to the index; when the index is made up of 30 businesses against the one business you are observing. Assuming the business is doing well, retaining market share and generating decent FCF and profits, it does not make sense for an investor not to increase their stake when valuations are attractive.

On the other hand, averaging up does entail its own set of risks as this means you will be purchasing at a higher valuation, unless you assess the business to have grown significantly such that there is still a margin of safety. This can be pretty subjective as all businesses are subject to economic cycles, and one may end up feeling that business prospects are "rosy" and thus is willing to pay a higher valuation to own part of the business.

Perhaps I may be biased too as I have never averaged up, but only averaged down in the last few years; but this is my philosophy and understanding of valuations and businesses. Averaging down is a strategy which must be very carefully weighed and involves significant reading, research and understanding before it should be undertaken.

My advice: Observe a company's business for say 10-12 years (if you have the data). If it has stable characteristics, is operated by competent Management and is in an industry which is not expected to undergo significant changes; then perhaps one can consider averaging down when valuations plummet (as a result of say a crash or a bear market).

Just my 2-cents.

[koh_52]

It better to be stupid than smart to survive in the market.

Just follow the market trend to decide when to enter and exit based on pure price action you will have chance of making money consistently.

Those who insist on averaging down will only do so at the expenses of their own pocket, once hedge funds unwind their positions, selling pressure will continue for months.

Indeed most make their money at buying uptrend, best time to buy into stocks. i.e. when new highs abound.

Hehe, so long as losses are capped and winners are allowed to run, 1 will consistently make money, this is mathematical.

Oops, market timers do not believed in averaging down, e.g. uncle Li Kah Shing only dip in went market shed blood or severely crash.

Well, well…most important how paper loss can affect you psychologically, if you have substantial paper loss and yet steady n sleep soundly at night, no feel nervous each time the market opens, not glue to the monitor every now n then. Then by all means hold and buy all the way down .

[KopiKat]

If you'd done your homework and the fundamentals of the company had not changed, a falling price means a stock is now even cheaper than before. So, I don't see why you should feel any fear to buy more of a good stock at a bigger discount!

Remember what Warren Buffett (or was it Benjamin Graham) who says that the market is like a voting machine in the short term but a weighing machine in the long term.

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