Jump to content

Averaging down/up


tombgrt
 Share

Recommended Posts

I had this discussion on another (dutch) forum the other day.

 

In my view, averaging down can be a winner as long as you do your homework, are value-oriented (get your MOS!) and make sure you don't make the position too big for your portfolio.

 

Another investor, focused on momentum trading and growth stocks, claimed that averaging up is the only way to go and that averaging down only leads to bigger losses.

The second guy, I think he uses a lot of technical analysis in his trades, claimed the same thing and even said that "soon enough, every investor walks into an Enron or Worldcom" (confirmation bias? I don't hear anything of the thousands of stocks that don't do anything illegal). He claimed that sooner or later, averaging down would whipe you out and you could forget about your carreer in investing. Seems to me that this can only happen if you underdiversify but oke...

 

Am I wrong? Why wouldn't you buy more of a great company that just got even cheaper if you have room for it in your portfolio and you redid your homework? I don't get it...

Link to comment
Share on other sites

I guess it depends on the relationship between the your thesis and the causes of the stock decline. I don't know much about technical analysis so I can't speak to your friend's argument, but everyone is prone to overconfidence. We are talking about subconscious effects so, in a sense, you do have to "be lucky" that your emotional makeup doesn't subvert your analysis.

Link to comment
Share on other sites

I would say it depends  ;).

 

If you average down and the price eventually recovers then it works. If you swing big and hit a big bag of .. then.....

 

I have done both. I would say it depends on your thesis and why its falling. Alot of times averaging down can be best described as being stubborn.

Link to comment
Share on other sites

Are you a trader or an investor? If you are buying the trend, an increase in price would signal an affirmation of the market's enthusiasm, and averaging up might make sense. I disagree with that strategy personally. On the other hand, an investor recognizes that price has little relation to value. If one is confident in one's convictions, the only rational response to a lower price is to average down. Obviously one needs to be aware of diversification, however.

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...