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STRAT
30-12-2010, 10:15 AM
Im amazed at the number of Investors let alone traders who practice this form of gambling.
Personally, I dont do it.

I dont even average up. Almost never.

I am somewhat perplexed by the practice. Anyone who does it want to explain why?

POSSUM THE CAT
30-12-2010, 10:32 AM
Strat Buying bank shares in the big downs has been very profitable for me getting as much as 15% return in dividends alone on some purchases but purchases are not large and very seldom purchase on a rising market.

STRAT
30-12-2010, 10:39 AM
Strat Buying bank shares in the big downs has been very profitable for me getting as much as 15% return in dividends alone on some purchases but purchases are not large and very seldom purchase on a rising market.Hi Possum. Can you post an example that shows the merit of averaging down? Some sort of plan that works rather than... Well you know... Good luck rather than good judgement. Ive made a few bucks out of bad decisions myself but like solders in a trench, if one pokes ones head up often enough sooner or later it gets blown off. :D

Corporate
30-12-2010, 10:44 AM
Im amazed at the number of Investors let alone than traders who practice this form of gambling.
Personally, I dont do it.

I dont even average up. Almost never.

I am somewhat perplexed by the practice. Anyone whoes does it want to explain why?


STRAT, I think there is a place for averaging down if you have a clear handle on the fundamentals. By clear handle on fundamentals I mean you absolutely know that the share is mispriced.

I averaged down on CFE and made an additional 43%.

I think Gazprom will testify to averaging down.

STRAT
30-12-2010, 10:54 AM
Hi Corporate.
I see your point if the fundamentals have changed but if they havent?

Averaging down is "adding to a loosing position" yeah? What I often do if I like the FA behind a company is sell it if it heads south and buy it back when its in recovery.
In doing this I attempt to eliminate fighting with market sentiment. This has been a very good strategy when you consider what the markets have done over the last few years but it would work in all market conditions. What Id love to see is an example where averaging down beats this strategy.

Corporate
30-12-2010, 11:06 AM
Hi Corporate.
I see your point if the fundamentals have changed but if they havent?

Averaging down is "adding to a loosing position" yeah? What I often do if I like the FA behind a company is sell it if it heads south and buy it back when its in recovery.
In doing this I attempt to eliminate fighting with market sentiment. This has been a very good strategy when you consider what the markets have done over the last few years but it would work in all market conditions. What Id love to see is an example where averaging down beats this strategy.

Hi Strat

The only example I have is CFE.

I purchased at 40c, received a dividend of 7c and the share price is currently 50c. Currently a return of 43%.

During this time the share price decreased. I purchased an equal holding to my first at 35c, no dividend. Currently a return of 43%.

Now I could have sold the first lot and repurchased. But I also could have been out and missed a big announcement which would have seen a significant re-rating. I also probably wouldn't have received the dividend.

If I like the story I'd prefer to be in rather than out (market depending).

Snoopy
30-12-2010, 12:03 PM
I see your point if the fundamentals have changed but if they havent?

Averaging down is "adding to a losing position" yeah? What I often do if I like the FA behind a company is sell it if it heads south and buy it back when its in recovery.
In doing this I attempt to eliminate fighting with market sentiment. This has been a very good strategy when you consider what the markets have done over the last few years but it would work in all market conditions. What Id love to see is an example where averaging down beats this strategy.


What you are really asking here Strat is for an example where a value based investment strategy (buying shares where you have a different timeframe to the market regardless of what the share price is doing) beats a growth based investment strategy where you are looking for shares which the market currently favours and the share price is on the up and up. A search on google should provide many examples of that.

'Averaging down' is really a traders term. IMO it is impossible to 'average down', because if you buy shares on market at a price lower than you orginally paid your original shares are also only worth that price you paid on the market today. Thus IMO it is only possible to 'average across', or buy shares on market at the same price as those that you already hold that the market has already revalued downwards. The market will give you an opportunity to sell or buy if you want to. But whether you act on that offer or not is purely voluntary on your behalf. If you don't need to buy or sell you can just ignore the market On any given day at least 95% of investors do exactly that.

In my own case for my NZX income portfolio, I think I have 'averaged down' in trader terms on every purchase and in so doing beaten the market return by 8 percentage points a year for five years (on average). My best years even in gross terms have been the years when the NZX has done worst. As to whether a growth strategy would have yielded better results over the same time period, a quick perusal of the NZX listed funds, which as far as I can tell all seem to be operated using a growth strategy, indicates I have beaten all of them over the last five years. This is what I would expect, as there is much research out there that shows over the long term the chances of a growth strategy beating a value based strategy are negligible.

So despite what you read here from some, 'averaging down' (sic) as a value portfolio strategy can work really well in practice, with the caveat that you have to be prepared to hold shares across the ups and downs of the business cycle at times. You also have to get around the concept of 'good' and 'bad' investments and realise that all investments are just different shades of grey.

SNOOPY

STRAT
05-01-2011, 08:50 PM
Hi Snoopy.
Thanks for your excellent reply.
I might have to continue this discussion at a later date when I have more time to digest and think on your comments. Im sure an off the cuff response will only leave me out of my depth and with red cheeks.

h2so4
05-01-2011, 09:32 PM
I don't have a problem with averaging up or down but I usually do it at the time of purchase buying in tranches over days or weeks. The reason is when I buy I find the sp price usually falls. :D