Averaging Down

[mrEngineer]

MW allow me to use your portfolio as an example for discussion. Would u average down tat hong, swiber or erza? And why not?

However if u put your shoes into an young investor with 1-2 years of investing experience and no matter how much he has done his homework or look into long term AND if he average down he would probably wipe out his entire savings. Would u advise him to average down still? If u doubt him, he probably doubts himself as well. Koh is right about handling e paper losses psychologically. Imagine how much time spent on unneccessary worry on e stock performance and maybe hindering your other aspects of life. Opportunity costs does not come in the form from the index only, it can be also on other potential investments that u make pass just because u are irritated the red spot in your portfolio.

In general, if u fit what I described above and see opportunity to average down, I would advise u not to average down. If you believe you are right still, as like what MW has said if you invest long term enough and you have already predetermined a margin of safety on this security, you will earn your profit just not as much one day. Just do not add on the risks of it not happening as there are plenty possibilities events may happen (accounting fraud, change in management, account receivables bad debt, delist company, rights issue or placements etc). Alternatively, if u really insist to average down, post ur investment thoughts here in valuebuddies and most of expert investors would not mind to clarify your thoughts before u taking action. It happened to both me and Nick as well.

As of averaging up, I agree with MW as it entails similar risks and I had one bad experience that if u are not willing to look into the short term and continue to hold your profit thinking it will never end rising, average up may not be suitable for u. I believe average up should have a max investment span of 1 year only. Remember the higher the price goes, the ratios becomes more inflated, the higher your risk.

[kazukirai]

Wow, I think this qualifies for 'Thread of the Week'. Great discussion and great views.

My personal view is that Valuation matters. I usually have price targets for entry and exit. This is based on FCF and Book Value; and gives me an indication of whether a company is undervalued or overvalued.

Therefore, my view is that whether to Average Down or not will depend on a company's valuation. My entry prices are rarely hit (only in extremely bearish scenarios) so I haven't really had the (nice) problem of Averaging Down but I would if the fundamentals of the investment thesis have not changed.

For the young investor, this can mean twiddling your thumbs for a long time so in my opinion, it's important to have cashflow as well. As for cases of fraudulent financial statements and the likes, thankfully, I've sidestepped these so far. Maybe it's due to me being naturally skeptical of many things that sound too good to be true or maybe I've been lucky, but I tend to stay away from these type of counters that analysts cheer on because of their astronomical growth rates and their ability to seemingly go on forever. I can only hope to be as lucky in the future.

As for opportunity costs or the things that pass us by, I'm not too worried about those either. I leave all Buddies with a cautionary tale of what might happen when people chasing after the next Microsofts and Apples and ignore valuations. (excerpt: )

“Admit it, you still have nightmares about the ones that got away. The Microsofts, the Ciscos, the Intels. They're the top holdings in your ultimate ‘coulda, woulda, shoulda’ portfolio. Oh, what might have been, you tell yourself, had you ignored all the naysayers back in 1990 and plopped a modest $5,000 into, say, both Dell and EMC and then closed your eyes for the next ten years. That's $8.4 million you didn't make."

Fortune put together a list of ten stocks that they described as “Ten Stocks to Last the Decade” – a buy and forget portfolio. Well, had you bought the portfolio, you almost certainly would wish that you could forget about it. The ten stocks were Nokia, Nortel, Enron, Oracle, Broadcom, Viacom, Univision, Schwab, Morgan Stanley, and Genentech. The average P/E at purchase for this basket was well into triple figures. If you had invested $100 in an equally weighted portfolio of these stocks, 10 years later you would have had just $30 left! That, dear reader, is the permanent impairment of capital, which can result when you invest with no margin of safety.

Full article here.

[bluechipstamp]

When you average down or up, you're buying more of a stock you already owned. The fact that you already owned it should be irrelevant to whether you purchase more. The question is not whether to average down/up, but whether the stock is the best deployment of capital at that moment in time, among all available opportunities.

As the wise one said, “You don't have to make money back the same way you lost it.”.

[wsreader]

Averaging up is a happy situation so there is not much to discuss there. By setting your trailing stops above your average price, profit is guarenteed.

Lets discuss averaging down. The only way to be profitable from averaging down is that the price bounce up to higher than your average price sometime in the future. Therefore the issue is not average down per se, but whether the price will bounce up. Price can bounce up due to
a) improved market sentiment, ie trade is profitable due to luck
b) improved company fundamental, ie trade is profitable due to solid knowledge of investor in recognising the value before the market, but it may take a while for market to recognised value
c) improved macro/geo-political situation, which are mega forces too big for investor to predict accurately

In short, there is little a retail investor can do to actively make the averaged down trade profitable.

On the other hand, if the price will bounce up, there is no need for an investor to catch the bottom. Just start buying on the way up, which is the preferred trading method.

That is why generally, average down is not recommended, imho.

[koh_52]

As the wise one said, “You don't have to make money back the same way you lost it.”.

Well said....but WB no.1 & 2 rules said 'never to loss money.'

There are 3 distinct investing strategies.

1. Disciples of Graham - buy under value stocks (i.e. buy low & sell high, preferably with a good safety margin

2. TA puristic who try to time the market with their arrays of indicators.

3. The trend followers - who buy high & sell 'low', hehe sound counter intuitive, in reality, one can be buying high & selling higher.

Market trends

My view, when mkts in downtrend, Times to be is CASH.

Not impossible to tell bull or bear market, its need some common sense, when prices fall day after day, it does not take a genius to figure the trend is down. On the other hand, if prices rises more often than they falls does, also no need to be a genius to tell that an uptrend is underway?

Btw, my remiser an ex-colleague (also my ex-boss, who taught me ppty investment ) had coffee with me told me, his take market potential in uptrend till year end...above is his experience on trends but we hardly play stocks, not our cup of tea.

How is the bottom made?...

To those hardcore value investors out there who are busy buying into decline, the sharp falls seems like a heaven sent once in a life time opportunity to buy on the cheap.

However, for those who are familiar with market cycles, one thing is certain..it will repeat all over and over again...like a old broken record.

In the uptrend almost everyone including newbies makes money. The amateurs and newbies converted value investors are frequently the ones left holding the bag when the the tide goes out.

A downtrends does not just bottom overnight. The contd volatility means downtrend is far from being over. What makes the start of a possible bottom is when volatility reverts (i.e. market goes back to being boring no longer front page news. Once markets are relegated to a side show status, the intelligent investors will then start to watch for a possible uptrend in the works.
It does not mean you jumps onto the wagon immediately, Instead, look carefully to see the price volume action of the leading stocks, one would focus on stocks which are only 15% to 20% from their all time highs with good fundamentals of course.

- if you see majors market indexes start moving up on heavy volume and there are more up days than down days, start watching this set of stock closely.

- the moment 1 of these stocks breaks out to a new high on high volume , its would be the moment 1 should start preparing as more n more stocks start to break out, thus confirming the uptrend...the process continues until the tend changes....Ok, time to stop here, as my remiser sifu only teach me until here, as we are not a professional stock trader.

[KopiKat]

IMO, the most important thing to consider before averaging down is the company fundamentals. If it's strong, any price weakness is just an opportunity to buy at a lower price (I'm repeating my earlier post and beginning to sound like a parrot). Some recent eg. that I can still remember from the past few years,

1) Starhub (Part I) - It was hovering around $2.3x when I decided to buy for the yield and looking thro' their financial statements and concluding that the DPU was sustainable. Soon, the price started to drop when they lost their EPL bid to Singtel. There was also the added concern highlighted by analysts and many in forums that the loss of EPL customers will also have a much greater impact as there are many customers who are also Hubbers ie. Cable + Mobile + ... Analysts started to paint a gloomy picture and also highlighted the fact that Starhub do not have the rights to sell the Apple iPhone (which was starting to dominate the Smartphone market). The share price dropped to $1.8x. I don't deny I was feeling fearful. But instead of cutting loss, it spurred me to scrutinse their financials in greater detail. I realised that their Cable business was actually losing money as they'd paid too high a bid for their EPL rights previously. They'd even lumped Cable business with Broadband business as a single segment and this even showed a loss. The other observation was their mobile phone business actually contributed the bulk of their profitabilty. With that, I plucked up my courage and averaged down.

2) Starhub (Part II) - It was around a year after (1) and the latest financials from Starhub showed that the mass exodus of customers had not happened, even as Singtel gained many new sign-ups for their Pay TV business. Starhub share price had recovered and even gone higher than my initial purchase price. But, we were suddenly hit by a huge EPS drop. Apparently they'd been too successful with their iPhone (yes, they now have the rights to carry iPhone) marketing and as Starhub recognises the cost of equipment immediately (instead of amortising over the whole 2 years contract), this caused the huge drop in EPS. The market again reacted negatively and there were many experts in forums who highlighted the fact that DPS > EPS and Starhub was actually using their cash reserves to pay their DPS. Yeas, another bout of fears made me study their Cash Flow statement in greater detail. I concluded that the CEO was telling the truth when he said their FCF is able to sustain the DPS. Again, I bought some more Starhub as price weakened. Over a period of 1 year, Starhub EPS started to catch up with their DPS as the high cost pf Smart-phones is now offset by higher earnings (as cost from earlier sales was already fully recognised). Share price also recovered accordingly.

Note : At current price, I no longer think Starhub is cheap, although the yield is still very attractive

I can go on and on with many more examples such as SPH (over bid for Clementi Mall), Starhill Global (MMP back then) when they had to close the tunnel link to Orchard MRT station (many predicted they'll lose customers),....

The important thing is,... look at 1st paragraph again.

The other important thing is another quote (or misquote) from Warren Buffett. You have to put in a meaningful amount of money under such circumstances, otherwise, you wouldn't really profit a lot from such circumstances (but, you can also lose alot of money if you are wrong, that's why 1st paragragh is very important). So, yes, FA can be very boring and the rewards are not that fantastic most of the times. The bigger rewards come along during such circumstances of market or stock price weakness due to unusual circumstances and we have to be ready to profit from it (prob what Warren Buffett meant when he says his elephant gun is loaded).

[Jared Seah]

Average up and average down is like comparing the heads and tails of a coin. Technically they are still the same "coin".

Both work if the coin is of value and we think someone will pay more for it in the future. But if the coin is flawed or worthless, average up or down is merely throwing good money after bad money...

Are we married to our stock? Or to put it bluntly, can we admit and face-up to our own mistakes is perhaps the question to ask?

http://singaporemanofleisure.blogspot.co...whore.html

[Moolah]

Why the need to average down?

Cos ... the stock went lower.

But why la did the stock go lower?

Bad market sentiments mah...

If the sentiment is bad, why didn't we see it coming? Didn't they teach prevention is much better than cure?

What's that two Sun Tzu's Art Of War, timeless concepts mentioned many, many, many times before?

Think before you act.
Act only when you have the confidence to win.

If we had thought and reasoned it out carefully, won't it help eliminate the need to buy more because the stock went lower?

Of course, some will say, lower prices means more offer. True. But how long can we continue to say 'drop more buy more'? Are our pockets really deep enough?

But even if our pockets is really deep and we can afford it, shouldn't we think what we are actually doing here? Think about the stock we are buying. What if the stock is only considered good in our own shallow opinion and what if our opinion is wrong?

Does two Wong make a Wright?

What if we make a mistake with our stock selection?

Dare we say we will never make a mistake with our stock selection?

Yes dear, what if we bought the wrong stock?

And if so, doesn't buying more means we are buying more of the wrong stock?

And if the wrong stock is caused by our initial investment mistake, buying more means buying more of our mistake?

And if so, by averaging down, aren't we saying we can correct our mistake by buying more of our mistake?

oO

Think about it...

Mr. Soros became rich because he insisted he knew when he was wrong.

Mr. Buffett knew the only the way to get out of a hole is to stop digging.

Think about it.

What does one do when one make a mistake? Don't we want to rectify it? And isn't the best way to rectify it is by stop being wrong?

Yeah, instead of averaging it down, why don't we seriously consider if we did screw up with our stock selection or not?

And if we did... isn't cutting loss (ie rectifying our mistake) ... the logical thing to do?

And oh I do know... the tricky part here of course is.... determining if we are correct or we are wrong.

ps: Me? I am not a fan of the averaging down.

[flinger]

Why the need to average down?

Cos ... the stock went lower.

But why la did the stock go lower?

Bad market sentiments mah...

If the sentiment is bad, why didn't we see it coming? Didn't they teach prevention is much better than cure?

What's that two Sun Tzu's Art Of War, timeless concepts mentioned many, many, many times before?

Think before you act.
Act only when you have the confidence to win.

If we had thought and reasoned it out carefully, won't it help eliminate the need to buy more because the stock went lower?

Of course, some will say, lower prices means more offer. True. But how long can we continue to say 'drop more buy more'? Are our pockets really deep enough?

But even if our pockets is really deep and we can afford it, shouldn't we think what we are actually doing here? Think about the stock we are buying. What if the stock is only considered good in our own shallow opinion and what if our opinion is wrong?

Does two Wong make a Wright?

What if we make a mistake with our stock selection?

Dare we say we will never make a mistake with our stock selection?

Yes dear, what if we bought the wrong stock?

And if so, doesn't buying more means we are buying more of the wrong stock?

And if the wrong stock is caused by our initial investment mistake, buying more means buying more of our mistake?

And if so, by averaging down, aren't we saying we can correct our mistake by buying more of our mistake?

oO

Think about it...

Mr. Soros became rich because he insisted he knew when he was wrong.

Mr. Buffett knew the only the way to get off a hole is to stop digging.

Think about it.

What does one do when one make a mistake? Don't we want to rectify it? And isn't the best way to rectify it is by stop being wrong?

Yeah, instead of averaging it down, why don't we seriously consider if we did screw up with our stock selection or not?

And if we did... isn't cutting loss (ie rectifying our mistake) ... the logical thing to do?

And oh I do know... the tricky part here of course is.... determining if we are correct or we are wrong.

ps: Me? I am not a fan of the averaging down.

If you don't have trust in the company you are buying that you are not willing to average down when you have evaluated that fundamentally it is a sound company and it might be getting lower due to market sentiment, economy issues, trading etc.... then maybe you should not be buying the company stocks in the 1st place.

Ultimately, it all depends on your portfolio and if the company you want to average down needs addition at the current price.

If the particular stock has already fulfilled the % in my portfolio then I would not buy anymore even if it goes down.

If I do, then I am trying to earn some side money by trading the stock, which in that case is trading not investing.

[Moolah]

flinger: Like I said, the tricky part is to determine if we are correct or we are wrong.

Many times, a stock goes down, the investor always insist that they are correct and that the market is wrong. They then proceed to buy more.

But what if the investor is wrong?

What if the investor makes the simple mistake with their stock selection?

Is this not possible?