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Averaging Down - Good Idea or Foolish Risk?
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Manikamaniko.
Master |
18-Aug-2007 17:24
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Although averaging down during a bear market is absolutely dangerous, it is a rather common practice.
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singaporegal
Supreme |
18-Aug-2007 17:06
Yells: "Female TA nut" |
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A very good post by Kilroy! I don't use averaging because I trade stocks in discrete amounts and I'm a short term trader. I execute trades when trend changes. |
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stevento
Senior |
18-Aug-2007 09:30
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Question to ask yourself- Why are you investing? Any strategy you adopt and adapt is to help you maximize your capital gain plus dividend income to offset your income tax. Just keep things simple: Buy low and sell high. Be it you are in here for the long term or short term. Practicing this will take you a life time to master. Investment is a discipline. I have just 3 investment philosophy when I invest: 1. Look at the company Annual Report- P&L, balance sheet, Revenue, Operating Margin, PE, Book value, Fair valuation, Low debt ratio. 2. The management team 3. Potential of the company. So i do agree, accumulate the shares if the 3 things principles are fulfilled and the shares are fairly valued. Sell into a rising market that has got out of hand to take profit. Usually, it is between 15-100%. |
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ten4one
Master |
18-Aug-2007 09:17
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There is no such a thing as a good strategy or a bad one as far as I'm concerned. As long as it makes money for you, then it is a good strategy. You'll never know whether the strategy works until you stayed the course. Average down is not the same as accumulation. You average down at a certain 'tempo' and pricing; and must know exactly when and how to dispose when the Market reverses so that you could maximise your efforts. Average down is definitely not for the average Investors - I'll advise against it! Accumulation is for the long term Investors (I mean real long term). You accumulate the Company's share as long as the fundamentals are all intact. It doesn't matter whether the px is up or down. As long as the share px is below its book value, you accumulate. Of course, when it is down, you get more for less. Cheers! |
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taybc1071
Senior |
18-Aug-2007 08:36
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kilroy, very useful post for those who cannot decide whether to average down or not. Thanks for sharing. |
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TradeChancellor
Veteran |
18-Aug-2007 02:12
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That was excellent Kilroy, very clear explanation! Very applicable to me as i'm usually contemplating whether to average down or not. |
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bunbun
Senior |
18-Aug-2007 01:47
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kilroy, thanks for sharing. that's good :) happy weekend. |
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KiLrOy
Master |
18-Aug-2007 01:15
Yells: "I buy only what I can see." |
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Something to share for the weekend and ahead. ------------------ Averaging down is a strategy to lower your average cost in a stock that has dropped in price. Is this a good idea or throwing good money after bad? The answer depends on several factors. First, let me describe how it works. You buy 500 shares at $50 per share, but the stock drops to $46 per share. You then buy another 500 shares at $46 per share, which lowers your average price to $48 per share. Admittedly, this is a simple example, but you get the idea. Good Strategy or Bad?Now, is this a good strategy or not? If the stock rebounds to $60 per share, then it was a great strategy. However, if the stock continues falling, you have to decide to keep averaging down or bail out and take a loss.Which brings us back to the question, is averaging down a good strategy or not? Before we can answer that question, we need to decide if we are investing in a stock or a company. The distinction is very important.
Investing in StockIf you are investing in a stock, you look for buy and sell signals based on a number of indicators. Your goal is to make money on the trade and you have no real interest in the underlying company other than how it might be affected by market, news or economic changes.In most cases, you don?t know enough about the underlying company to determine if a drop in price is temporary or a reflection of a serious problem. Your best course of action when investing in a stock (as opposed to a company) is to cut your losses at no more than 7%. When the stock drops that much, sell and move on to the next deal. Investing in a CompanyIf you are investing in a company (as opposed to a stock), you have done your homework and know what?s going on within the firm and its industry. You should know if a drop in the stock?s price is temporary or sign of trouble.If you truly believe in the company, averaging down may make sense if you want to increase your holdings in the company. Accumulating more stock at a lower price makes sense if you plan to hold it for a long period. This is not a strategy you should employ lightly. If there is a heavy volume of selling against the company, you may want to ask yourself if they know something you don?t. The ?they? is this case will almost certainly be mutual funds and institutional investors. Swimming against the current can sometimes prove profitable, but it can also get you swept over the waterfall. ConclusionIf you?re playing stocks, averaging down probably doesn?t make any sense. Take a small loss before it becomes a big loss and move on to the next trade.If you invest in companies, averaging down may make sense if you want to accumulate more shares and are convinced the company is fundamentally sound. |
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