MY SOLUTION TO AVERAGING DOWN

[duncan macgregor]

SNOOPY, I look on it as being the one big flaw in a fundamentalist share strategy. Without a stop loss at a predetermined level a investor risks losing all their good gains with one bad investment.
In a perfect world where everything is foreseeable yes. We are not told the truth companies make decisions behind closed doors all sorts of greed and corruption with inside trading etc etc. To convince yourself you are right is the wrong thing to do. We are never 100pc sure so therefore it pays to have systems in place with the odd one that goes bad. Throw the bad apple out the box before it rots the others. cheers macdunk

[Westie]

MacDunk
IMHO setting a stop loss at a predetermined level is effectively saying the market is right no matter what i.e. the market is efficient. If the market is efficient, then there is no point having any buy/sell strategy whatsoever, stock performance is random.

If the market is not efficient, then setting a predetermined stop loss is a less than desireable strategy as a price drop represents an opportunity to assess whether the market is right and something fundamental has changed about your investment, or the market is wrong and is offering your an even better bargain. Mechanically selling is passing up the potential to better your returns

[duncan macgregor]

WESTIE, You are wrong with what i said. The market is what proves you right or wrong. Nobody is right 100pc all the time, there are to many unexpected things to go wrong, to many lies you listened to, and to much going on behind the scenes that you and i are oblivious off.
To have a system that says you are right, and the market will find out, and play catch up in my own experience works out four out of five. In my case the fith one, or the bad apple either goes nowhere or drops in price. It is the same thing your money is not working or is going down. When your money stops working or goes down it pulls the others down with it like a bad apple in a box. It is only common sense to realise to take a small calculated loss on the one apple, and buy another apple, rather than bleat on about how good the apple is and watch it rot the others. It is mr market that decides the winners and losers, and mr market is a complete lunatic.
In my own case i buy in a 50pc holding of my intended lot in a company if it drops 5pc im gone if i am proved right i buy the other 50pc holding with a predetermined stop loss to suit the company. I normally buy in lots to suit brokers fees. My other completely seperate way of trading is spec buying and selling, which i do for a bit of fun as with buying and selling nog and others.
In other words WESTIE the answer to successfull investing means dont let a little mistake turn into a big mistake. macdunk

[whiteheron]

macdunk

I am pretty much in agreement with what you say on this issue

The way I look at it is that the market is not necessarily right or wrong , BUT IT IS KING
Whatever the market says is it , no ifs , no buts , no maybies --- an individual investor can argue all he likes , and his arguments may well be very logical and valid , but if THE KING says otherwise then that is it and there is not a dammed thing that an individual investor can do

On the positive side however this is what creates opportunities , especially for those of us who trade frequently (I have been trading several times a day recently )

One has to try to read the market better than most others (not always easy , but very rewarding when it all goes to what you assess and predict )

My aim is to get it right about 4 out of 5 times , difficult but sometimes achievable
It is most important to limit your loss on the ones that dont go your way --- if you dont do this the one bad trade will invariably wipe out all of your gains on the other 4 or so trades

Cut losses ruthlessly before they become serious (use stop losses ) and follow winners rather than losers

[Westie]

Yes, the market will prove you wrong or right, but only with the addition of time.

“In the short-term the stock market is a voting machine; in the long-term it’s a weighing machine.”

Benjamin Graham

Mechanically selling the moment a price drop occurs without taking into account the human foibles of fear and greed that grip the market from time to time will eliminate one of an intelligent investors greatest assets, the ability to think for oneself and not follow the herd.

The only way to beat the market is to exploit other investors' mistakes.
-- Charles D. Ellis

At any rate, it appears that timeframe is the key difference between those that see a price decline as an opportunity vs those that see it as a signal to sell.

It is of course wise to tailor your strategies to your investing style.

[whiteheron]

Thanks folks for your valuable and thought provoking comments --- much appreciated
I have gained some most useful pointers from our discussions

One point that nobody has mentioned , myself included , is averaging down on winning situations and it is here that on occasions I have had considerable success

Taking LAF.AX as an example I originally purched several parcels of these at between 9c and 11c
When the price increased to about 12.5c I sold about 50 % , later buying back at about 11c
Again I sold at about 14.5c to later buy back at about 12c and I have continued this process through to the present , with the result that I now have a nice sum invested in LAF at a really excellent average price and I consider that there is still considerable upside in this company

If you have satisfied yourself that a company has bright medium to long term prospects together with a volatile share price then I consider that the averaging down on a winning situation can be very profitable , but it does require some committment and fortitude
LAF was an example of this , a company with excellent prospects but country risk (now not applicable as a result of the recent Singapore Supreme Court decision ) the perceived country risk probably adding considerably to the volatility

All in all , I consider that averaging down on a winning situation to be a much better bet than so called averaging down on a losing situation

I have come to the conclusion that it is more profitable ( and fun ) to follow winners rather than losers
Having said that , I still buy at a better price if circumstances warrant ( after re satisfying myself about a company and its future prospects )

The terminology "averaging down " on a losing situation has been removed from my vocabulary as it can give a misleading impression

Any other thoughts / comments on this will be appreciated

Good investing

[Lawso]

quote: I normally buy in lots to suit brokers fees.

What does that mean, macdunk? That you buy sufficient to get a reduced rate of brokerage, or to avoid a broker's minimum fee?
I'm accustomed to paying 1% brokerage on virtually every transaction, always buying enough to ensure I avoid a minimum fee. I only trade by phone, btw, never on the net.

[duncan macgregor]

WESTIE, you mention fear and greed, you might include panic in that lot. The market over reacts going up, and going down, making great trading opportunities for the smart investor. The price in a good company will get pushed to high [everybody loves a winner]. the smart investor gets out, and the sp will drop or go sideways for a while then surge up again. MHI is a perfect example of this it is going sideways right now. When a share drops in price it normally drops gaining speed as it goes triggering stop losses on the way down. The people left holding the baby are the fundamentalists that are convinced they are right, and the market is wrong. That to me is stupid we are trading to make money if a share is going down get out and buy into something trending up. macdunk

[Lawso]

All right then, don't answer my question. See if I care, you ill-mannered Scottish g*t.

J J (just joking)

[Snoopy]

quote:Originally posted by duncan macgregor

SNOOPY, I look on it as being the one big flaw in a fundamentalist share strategy. Without a stop loss at a predetermined level a investor risks losing all their good gains with one bad investment.

I have been thinking about what you are saying here Macdunk. Actually I do have a 'stop loss' in place for all my buys. But it is not one determined by Mr Market. After all short term, as you said yourself, Mr Market is a lunatic. So determining a 'stop loss' is much too important a job to give to someone like that.

My stop loss is based on the fundamentals of what I could lose, given the worst scenario. A company that makes no money is an obvious warning sign. But if a company is risky I look to other indicators like where the share price sits in relation to the asset backing. And what would be the minimum time the company could repay all its debt, if it diverted all its profits to doing so. I also look at comparative statistics like 'market capitalisation to sales' or 'sustainable earnings yield' (for example) to see how cheap the company is relative to other companies out there.

I use gauges like these to determine where the floor may lie in relation to where the share price is now. I will only buy if the amount I lose should things turn to custard be limited. Mr Market may determine some of the benchmarks I use over time. But as to his day to day ravings, well, I prefer to ignore those when setting up my purchase and associated 'stop loss'.

quote:
In a perfect world where everything is foreseeable yes. We are not told the truth companies make decisions behind closed doors all sorts of greed and corruption with inside trading etc etc. To convince yourself you are right is the wrong thing to do. We are never 100pc sure so therefore it pays to have systems in place with the odd one that goes bad. Throw the bad apple out the box before it rots the others.

Your analogy is a bad one (sic). Even a bad apple eventually becomes compost. Put enough of them together and eventually you will have a saleable bag of compost.

Even Ron Brierley is on record as saying that in many ways knowing where to seek out a bargain is easier now than in his heyday, because so much of the company information you seek is now on line. There aren't nearly as many 'secrets' out there as the conspiracy theorists think. The main block to obtaining useful information is laziness, or the ability to read beyiond the most superficial headline.

Even a bag of bad apples can be a bargain if you don't pay too much for it. Buying at a price below ultimate market value is the key.

SNOOPY