Cost averaging

[RMAmmerschuber]

Right on topic......... My father is down %34 on Nortel......... he has been holding it hoping for a change of tune......... He just emailed me asking whether or not to buy into the obscene weakness in the stock....... strange timing!

No on Nortel yes to Lucent. Nortel is a dead horse, for the same money I would sleep better at night with Lucent if you gotta be in telecom equipment!

[RMAmmerschuber]

I voted yesterday to "Cut"...Heck, I bot ZIXI last year at 17.05...lesson learned...AGAIN!!!

Wish I had cut on Global Crossing. That was one stock that supported "No good money following bad"! On the other hand I held a position in TWX at 32 and just cost averaged down to $20 by tripling my share holdings. I think major research is most important. If it is a solid company just out of favor then take the risk.

[RMAmmerschuber]

So much depends on your initial strategy for the position. For long term holders of a position it can work to average down on the price. But for short term swing traders and momo guys your usually past your sell point an exit strategy and making the determination to exit the position is the priority, not adding more of a trade going in the wrong direction.

Although risky I stopped using exit strategies. Why you ask? Because every stop loss order I placed would execute only to find the stock bounce back 3 days later! My new "lessons learned" thought is I won't buy unless I am prepared to go down with the ship. This thinking of course only applies to the positions like GE, INTC et et... My stop loss orders have taught me to be a little less speculative. I'll take NT to the grave with me!

[RMAmmerschuber]

No way. There's no telling how far a stock will drop if it breaks under support. Part of my DCA plan would be to wait until it gets back to support to buy the other half.

Can it go below zero? I play with some pennies and just recently held OMOG at .018, tripled my holdings at .0073 for an average down to .011 and just closed the position at .0138 for a 25% profit.

[lak]

I'll take NT to the grave with me!

I thought you said it was a dead horse...........

I feel that if it is a stock you still believe in both fundamentally and in their business model, DCA is not bad....... but if That stuff changes........ drop it like a bad habit.

[aggredior]

I thought you said it was a dead horse...........

I feel that if it is a stock you still believe in both fundamentally and in their business model, DCA is not bad....... but if That stuff changes........ drop it like a bad habit.

"Believe" That word will get you into big trouble. What does "believe in both fundamentally and in their business model,..." have to do with DCA? If a stock is in decline, how does "believe" help? IMO, it is better to buy a stock when it confirms your beliefs, rather than while it is proving you wrong.

Most great investors have said "Protect your capital." This is good advice and requires cutting losses, not increasing them. Those same great investors caution against averaging down. Of course you may be connected to CEO's and other market movers, which could justify DCA.

[Karel]

"Believe" That word will get you into big trouble.

Errm, no. It might be a poor choice of words, but that is about as far as it goes. Allow me to give an example: On April Fool's day 2002 I bought MGAM (Multimedia Games), a seller of gambling machines for reservations. Shortly after that, some authority started an investigation into their machines, because they violated some rule or other. The stock dropped; I held tight. My reasoning was: Hey, they are in this business, they know about this thing, either the authority is mistaken or they will work something out. The latter proved true. I sold MGAM in October 2003 for a 15% gain. All through that time, MGAM kept growing revenue and earnings.

But I don't mind your being wrong

Regards,

Karel

[aggredior]

Errm, no. It might be a poor choice of words, but that is about as far as it goes. Allow me to give an example: On April Fool's day 2002 I bought MGAM (Multimedia Games), a seller of gambling machines for reservations. Shortly after that, some authority started an investigation into their machines, because they violated some rule or other. The stock dropped; I held tight. My reasoning was: Hey, they are in this business, they know about this thing, either the authority is mistaken or they will work something out. The latter proved true. I sold MGAM in October 2003 for a 15% gain. All through that time, MGAM kept growing revenue and earnings.

But I don't mind your being wrong

Regards,

Karel

Karel,

I don't mind be called wrong, heck I am many times. I might even be wrong this time, eventhough my post represents nothing by my opinion about cost averaging down. In your example you don't mention buying more MGAM stock as its price declined. You just held onto your shares rather than selling them for a loss. To me that is a selling decision that worked out well for you and I'm glad for you. But, my post, and most on this thread, are about cost averaging down, which is a buying decision.

I may be wrong, BJ may be wrong, Livermore may be wrong, and O'Neil may be wrong, however, your argument will need to be more on point to demonstrate that claim.

[lak]

"Believe" That word will get you into big trouble. What does "believe in both fundamentally and in their business model,..." have to do with DCA? If a stock is in decline, how does "believe" help? IMO, it is better to buy a stock when it confirms your beliefs, rather than while it is proving you wrong.

Most great investors have said "Protect your capital." This is good advice and requires cutting losses, not increasing them. Those same great investors caution against averaging down. Of course you may be connected to CEO's and other market movers, which could justify DCA.

Agreed. Might be the wrong choice of words. I originally said in my reply on this thread, the first one I wrote, I don't like to DCA much. I also said in my first post I can't see tossing so much capital at a slow mover that is not providing movement into a postivie direction. I usually won't.
However the only case I can see doing it in, is if what I said above is true. Now I take NT for example. My father wants to DCA it down as he has had it a long time. My problem is that I don't believe in them........ I think they have a broken business model (although a lot of cash), don't file on time and even their own people brought in to change things are jumping. I told him to sell or hold, but NOT buy more. If I just saw the price drop but the model still there, I would say do you still believe in this company? If you do then buy more for less it's that simple if you are extremely long on a company.

So really I agree with you completely........ except one little chance that you are willing to take a belief over what you see on the chart. It is the only time that I might be willing to DCA. Scary perhaps, but true. ha

[Karel]

I may be wrong, BJ may be wrong, Livermore may be wrong, and O'Neil may be wrong, however, your argument will need to be more on point to demonstrate that claim.

No, not at all. When it is possible to show that there are strategies where it makes sense to hold when the stock is dropping to half the buy point and lower, there can be no doubt that averaging down under those (or only slightly different) circumstances is defensible.

Your mention of O'Neill is actually a case in point: he uses an investing strategy that is so very much momentum geared, that averaging down makes no sense at all. I don't know about Livermore. But now ask yourself the question: would Warren Buffet ever average down? I can answer that one for you: if he is convinced that his analysis still holds, and he has free money that he doesn't think he can put to work in a better way, he will.

The mere fact that I didn't double down is hardly relevant for the discussion. In general, value oriented investors will average down whenever they can, and momentum investors will cut their losses. And they are both right. $$$Mr.Market$$$ has a "value oriented momentum strategy", so he holds. So do I. It all depends on your strategy.

Which is the nice thing with the poll question: given the right strategy, every answer is OK. Saying that one answer is wrong while you leave the strategy undiscussed, is, well, wrong

Regards,

Karel

[lak]

No, not at all. When it is possible to show that there are strategies where it makes sense to hold when the stock is dropping to half the buy point and lower, there can be no doubt that averaging down under those (or only slightly different) circumstances is defensible.

Your mention of O'Neill is actually a case in point: he uses an investing strategy that is so very much momentum geared, that averaging down makes no sense at all. I don't know about Livermore. But now ask yourself the question: would Warren Buffet ever average down? I can answer that one for you: if he is convinced that his analysis still holds, and he has free money that he doesn't think he can put to work in a better way, he will.

The mere fact that I didn't double down is hardly relevant for the discussion. In general, value oriented investors will average down whenever they can, and momentum investors will cut their losses. And they are both right. $$$Mr.Market$$$ has a "value oriented momentum strategy", so he holds. So do I. It all depends on your strategy.

Which is the nice thing with the poll question: given the right strategy, every answer is OK. Saying that one answer is wrong while you leave the strategy undiscussed, is, well, wrong

Regards,

Karel

Well said and I totally agree!

[skiracer]

So it boils down to what your particular strategys and disciplines are rather than one way is right and the other way is wrong. Two sides to every coin.

[B.J]

Which is the nice thing with the poll question: given the right strategy, every answer is OK. Saying that one answer is wrong while you leave the strategy undiscussed, is, well, wrong

Regards,

Karel

Right on the money (so to speak ). Everyone on here has their own way.

The first question I asked $$MM$$ when I got on here was why he was willing to hold through big losses. Given his record, his way certainly works better than others. It's just not necessarily my way

[aggredior]

No, not at all. When it is possible to show that there are strategies where it makes sense to hold when the stock is dropping to half the buy point and lower, there can be no doubt that averaging down under those (or only slightly different) circumstances is defensible.

Your mention of O'Neill is actually a case in point: he uses an investing strategy that is so very much momentum geared, that averaging down makes no sense at all. I don't know about Livermore. But now ask yourself the question: would Warren Buffet ever average down? I can answer that one for you: if he is convinced that his analysis still holds, and he has free money that he doesn't think he can put to work in a better way, he will.

The mere fact that I didn't double down is hardly relevant for the discussion. In general, value oriented investors will average down whenever they can, and momentum investors will cut their losses. And they are both right. $$$Mr.Market$$$ has a "value oriented momentum strategy", so he holds. So do I. It all depends on your strategy.

Which is the nice thing with the poll question: given the right strategy, every answer is OK. Saying that one answer is wrong while you leave the strategy undiscussed, is, well, wrong

Regards,

Karel

This is just too civil--everybody is right. Gee, this is like kissing my sister. Actually, I don't agree with holding a stock that drops 40% as was first posted on this thread. I do agree that cost averaging is used to take a position in a stock (X shares @$, followed by X shares @-/+$, etc., until a total position is gained). I think Mr Market is wrong to hold some stocks, such as BEL. To me, this is a waste of capital and is a mistake that should be avoided.

For the average investor, not Warren Buffet (who I don't recall advising investors to cost average down), buying more shares of a stock because it has fallen 40% is a bad habit that can be very expensive.

Judging from history, all of these opinions will have little effect and investors will continue doing what they do.

Good investing to all

[B.J]

Actually, I don't agree with holding a stock that drops 40% as was first posted on this thread. I do agree that cost averaging is used to take a position in a stock (X shares @$, followed by X shares @-/+$, etc., until a total position is gained). I think Mr Market is wrong to hold some stocks, such as BEL. To me, this is a waste of capital and is a mistake that should be avoided.

People mitigate risk differently. I believe $$MM$$ goes the diversification route. IF BEL does happen to disappear, that's only 10% or so off his portfolio.