Averaging up and down? The benefits

[Dazza]

Ok i have been thinking from last nite about averaging and the power of it...


DOWN TREND STOCK
now buffet and others etc, will average down in a good company when the market turns on them...

because eventually they will rise.... now, whats wrong with the skill of selling at top, profiting it, and then buying back low?

1. fees... well aint that much really...
2. TAX......... i guess u wouldnt have that many trades a year? so that kind of cancels out...


now for a cr ap share, say FTX as have been presented with lately... say u brought at 1.70... intial sank to 70cents? sure u would buy to average down? then sank again to 44 cents? buy in again?

wouldnt it be a waste IMO?, so i dun see the reason for ppl averaging down on a downtrend stock..


UPTREND.
i see a real good value in here, of averaging up
say FBU for example with the posters i have seen,
those that brought at $3 or $5... would i guess buy at $5.50 recently when it went that low,
now with that i can understand, and its a good idea.

but averaging in a downtrend????? mmpf

your thoughts peeps?

[Lizard]

Dazza,
It may not be as good as the Halebop Strategy, but I've made some good money on averaging down in the past. But on reflection, I think it probably works best when the market is going sideways rather than trending up or down. It worked really well for me on NZ shares from 1998 - 2001.

A couple of other things:
1. It doesn't work when a company hits deep financial trouble - so double and triple check the latest accounting data before you buy more
2. It works for me as a long-term strategy, so I would usually leave 3 months between buys so as not to find I accumulated too many at the start of a downtrend.

[OldRider]

For me with a long term investing view point averaging up or down is irrelevant, thats just what the market does and I have to live with it.

The buying of a sound company should be the overiding consideration, then perhaps the choice between the best value companies, buying at once when the trend is up, watching & waiting if the trend is down.

[Halebop]

Hey Lizard - credit where credits due - I average down sometimes too. Unfortunately, it can be a case of thowing good money after bad. In my more disciplined moments as OldRider I will watch and wait (and sell my existing holding on stop loss or trendline break).

[I.T.Ancient]

It depends partly what sort of investor you are. I've been averaging down on ABA for some time. Although I expected the market to think likewise at some point, I didn't expect the sale of Eldercare at $10m over book value. The market reacted very rapidly to that news. Had I sold say in the $1.30's and taken a loss, I would now be looking at $1.70 and thinking of buying back in. What I actually did was far superior.

As a contrarian style value investor, this sort of thing happens all the time. Then again I would never average down on the likes of FTX, because I would never be in a stock like that in the first place - not because I knew it was a dog, but because IPO's don't suit my style - I am looking for shares which are oversold on negative market sentiment.

Funny thing is, that I prefer bear markets. Even good quality companies can be oversold in bear markets (remember where HBY was a few years ago?). In bull markets, it is harder to find such value, and averaging down is certainly more risky.

[Westie]

I average down in the right situations & i've done well out of it.
The way I view it is that averaging down shouldn't be an automatic thing, because lower price does not always = greater value. You need a decent initial analysis & reasons for buying in/beliefs in long term value drivers. If the price drops, then analyse why, is it sentiment or a real change in the underlying business? If the former, average down. If the latter & the reasons for initial buy-in have disappeared, sell out.

[Lawso]

I used to think averaging down made sense but have since realised it's sensible [u]only</u> if you're confident the company is really sound and can recover. Two where I've resisted any temptation to average down are GEN and RMG. Instead I reduced in each case as the slide got under way. Now of course I wish I'd exited altogether.

On the other hand, I've done so well out of the likes of AIA, FBU and CEN that I'm happy to keep on adding as funds permit, while raising the average buy prices. With TEL, however, which I paid as much as 845cps for in the early days, subsequent purchases have the effect of reducing the average - now 740 in my case.

[peat]

in forex they talk about doubling up your position when it goes against you.... so that it is more likely to come back to a break even point at least. But you can quickly blow your account if it keeps going against you. deep pockets required for this strategy to work, and always remains the potential for it to kill you.

[duncan macgregor]

PEAT, forget doubleing up that is money trying to play catch up.
That was a system that martingale devised to win at cards that had people leaping out windows to their deaths that followed it. It works most of the time but when it goes bad you lose the lot trying to save your first stake. You only have 23 chances costing a million dollars to save your first dollar stake. [rough arithmatic].
Golden rule number one, cut your losses, and start fresh, average down and chase your losses works sometimes, but when it goes bad it is twice as bad. macdunk

[kittydashwood]

dollar averaging is the oldest have in the broker book.
DONT DO IT
It's a sure sign that you are ignoring your system and have too much emotion invested in the company.

Unless you hold HQP of course. Right Mc Dunkle!