average in, average out

[luck]

my broker charges pretty low per share commissions, so i pretty much average and average out.  what i've been doing is waiting for margin of safety of 50% plus and hopefully extreme pullback  and then averaging in on trend confirmation the other way as a stock goes up.  the averaging in process keeps the stress low it seems.  if the stock stops going in the upward direction of the trend off the initial pullback, i stop adding and wait quite awhile to figure out what's happening. 

 

i think maybe a better approach is to stockpile or average down in greater amounts as the stock is falling after taking a small initial position.  phil town talks about this in "payback time".  for some reason, i don't have the guts to do this yet.

 

wondering how those folks who average in and average out go about doing it?  there has to be a better way than what i'm doing. thanks in advance!

[twacowfca]

my broker charges pretty low per share commissions, so i pretty much average and average out.  what i've been doing is waiting for margin of safety of 50% plus and hopefully extreme pullback  and then averaging in on trend confirmation the other way as a stock goes up.  the averaging in process keeps the stress low it seems.  if the stock stops going in the upward direction of the trend off the initial pullback, i stop adding and wait quite awhile to figure out what's happening. 

 

i think maybe a better approach is to stockpile or average down in greater amounts as the stock is falling after taking a small initial position.  phil town talks about this in "payback time".  for some reason, i don't have the guts to do this yet.

 

wondering how those folks who average in and average out go about doing it?  there has to be a better way than what i'm doing. thanks in advance!

 

 

 

Don't be hesitant to average in going down if you're sure what you are buying is a great value.  If you're not sure, then why would you be buying the stock?

[Palantir]

What are you buying? :D

[Guest wellmont]

i think most value investors average down. I don't think many at all wait for "confirmation" that the "trend" is higher. the more you read about real value investors the more you will realize they don't use any form of trend following trading patterns. if you really put those kind of statements under a microscope you'll probably determine that you're fooling yourself into thinking there is something there instead of randomness. it's pretty simple. the lower it goes the higher your margin of safety. so you are actually working against yourself by buying it as it rises.

[Palantir]

^ Unless you're buying HPQ, you'll always be averaging in  ;)

[luck]

thx for the perspectives.  it seems like averaging down is the way to go.  need to develop the mindset. 

 

not to say that my approach hasn't worked entirely, +26% in the last three months, since i started averaging up after severe pullback (also, causality behind returns can be explained by other variables).  but i am guessing if i had averaged down, returns would have been greater.

 

palantir, an example of a stock where i have taken a small .5% position is sandridge at an average price of $5.69.  my intrinsic value range is $10 to $12, but i tend to think in terms of probabilities.  thus, due to risks related to spending by the company, etc., i don't see the arrival at the intrinsic value range as a certainty, but rather an 85-90% probability within three years.  to twa's point, i should probably only be buying securities akin to the buffett punchcard where there is an even higher degree of conviction. 

 

sandridge stock is now at $5.20.  thus the gap to fair value has widened.  i can see their is forced selling from executives, ward, etc., so i suppose i should be buying if i had enough conviction.

[hyten1]

luck see i love averaging down

 

but it doesn't always happen

 

it against my nature to average up, but that doesn't mean it hasn't happen before.

 

sometimes with new information the investment you have made is even more attractive even with the run up in price.

 

BUT yes it hard to average up, its just hard :)

[vinod1]

Here is how I think about this. I would classify every investment opportunity into one of three categories

 

1. Businesses which increase IV at about 8% or more annually. Need not be smooth but they should be able to meet this hurdle over the long term as a normal course of business. Think BRK, JNJ, WMT, FFH, MKL, etc.

 

2. Businesses which about maintain their IV steady or increase at a sub par rate. Unlikely to go out of businesses but managers would need to do something out of normal course of business to increase IV. Think Dell, SD, FTP, LUK (in the past), etc.

 

3. Businesses which have a tough time maintaining their IV. Perpetually money losing companies, most net nets, etc fall under this.

 

This classification basically simplifies a lot of things like position sizing, buy/sell criteria including what to do in case of large price changes, holding period, etc.

 

Averaging in/out works well with investments of the #1 category but it is not a good idea for #3. Averaging in/out would probably be fine with #2 but within strict position limits.

 

Vinod

[luck]

thx vinod.  your response is the first response that provides a framework. 

 

when i posted this, i knew that most value investors believe in averaging down, but i was more interested in if they have an approach to how they average down - is it systematic in any way a la phil town and the "stockpiling/back up the truck in increasing increments" approach?

 

 

[LC]

If we take Vinod's 3-tiers of business classifications, I first off try to avoid #2s...I'm either looking to load up on #1s at reasonable prices, or #3s at really cheap prices.

 

So #1s I usually average down after about a 20% from my cost basis.

 

#3s I rarely average down as I usually just take the Graham approach and put a little bit in a lot of them, and sell once a catalyst emerges to bring the stock to a reasonable value.

 

In other words, I have no problem averaging down on good businesses, but I hate averaging down into bad businesses!

[Palantir]

I'm running into this problem right now. RHT is trading a little below my "buy" price, but I've already invested 1k/15k of my portfolio in it and don't want to invest more than 1.5k/15k, so I can't average in effectively, will have to wait for support and resistance.