Thursday, July 07, 2011

Drop More Buy More?

Why the need to average down?

Cos ... the stock went lower. :P

But why la did the stock go lower?

Bad market sentiments mah...

If the sentiment is bad, why didn't we see it coming? Didn't they teach prevention is much better than cure?

What's that two Sun Tzu's Art Of War, timeless concepts mentioned many, many, many times before?

  • Think before you act.
  • Act only when you have the confidence to win.
If we had thought and reasoned it out carefully, won't it help eliminate the need to buy more because the stock went lower?

Of course, some will say, lower prices means more offer. True. But how long can we continue to say 'drop more buy more'? Are our pockets really deep enough?

But even if our pockets is really deep and we can afford it, shouldn't we think what we are actually doing here? Think about the stock we are buying. What if the stock is only considered good in our own shallow opinion and what if our opinion is wrong?

Does two Wong make a Wright?

What if we make a mistake with our stock selection?

Dare we say we will never make a mistake with our stock selection?

Yes dear, what if we bought the wrong stock?

And if so, doesn't buying more means we are buying more of the wrong stock?

And if the wrong stock is caused by our initial investment mistake, buying more means buying more of our mistake?

And if so, by averaging down, aren't we saying we can correct our mistake by buying more of our mistake?


Think about it...

Mr. Soros became rich because he insisted he knew when he was wrong.

Mr. Buffett knew the only the way to get out of a hole is to stop digging.

Think about it.

What does one do when one make a mistake? Don't we want to rectify it? And isn't the best way to rectify it is by stop being wrong?

Yeah, instead of averaging it down, why don't we seriously consider if we did screw up with our stock selection or not?

And if we did... isn't cutting loss (ie rectifying our mistake) ... the logical thing to do?

And oh I do know... the tricky part here of course is.... determining if we are correct or we are wrong!
Me? I am not a fan of the averaging down.


Singapore Man Of Leisure said...

Hello Moola,

I saw your postings at Valuebuddies. We have similar views when it comes to averaging down.

The problem is first admiting we have made a mistake in our stock selection. The second is the will to act on our realisation!

Letting go is hard!

Moolah said...

Admitting that we have made a mistake.... that's not an easy task to do in life.

Which is why... sometimes... investing is..... tricky.

newbie said...

Dear Moolah,
Very good read these articles of yours.Even better was the opinions given from guests of your blog.
May I add that IMHO,averaging down works only when we have privy to confidential information.Since the chances of us kacang putih investors having privy to all that is practically zero,better not to.Especially when the market is near its all time high(like now).Cut loss at 10% of purchase price is always much safer.
As for,sell now buy back later,what is the time to buy back?Normally when we have sold a specific stock,would we be inclined to buy them back later even if it has dropped drastically?Isn't the reason why we sold is due to the fact that we have lost confidence in it?More so if it's falling like a tonne of bricks!!Like snowball would tell you,the market is always more knowledgable than all of us combined(ok-lah,he did not exactly say it word for word..).So if something that we like is falling drastically,is it not fair to say,avoid them at all costs and run for cover??
Just my thoughts..Have a good weekend.

newbie said...

By the way,Moolah,investing is not sometimes tricky,it is ALWAYS tricky..

Moolah said...

Averaging down gives one the easy option.

The option of not addressing if one's initial investment decision and stock picking is wrong.


As for,sell now buy back later,what is the time to buy back? Normally when we have sold a specific stock,would we be inclined to buy them back later even if it has dropped drastically? Isn't the reason why we sold is due to the fact that we have lost confidence in it?

Comment: Think about this.

If we sold ... and the stock dropped drastically... yes, it means our initial decision to sell was correct... but then... it's always in the market and the market spinners to counter back with 'THE SELLING IS OVERDONE' ...

and it's in the nature of market players ... to look for a rebound... that's all that matters.

Which is why... they say... no stocks fall straight down in a line.. and usually no matter how bad... there's a point of reflection.. where the stock could bounce back (how much? that's the tricky part, yes?). Likewise.. no stocks go straight up in a line.

But the key here... 'no matter how bad'....

for me... if the stock could fall very drastically after I sell... lol... it's best to leave it alone.
Why? Cos... surely there's a valid reason why it dropped so much!

And if the reason is valid.. doesn't it alter the fundamental reason to buy the stock?

Best example?

Gamuda's selldown..

think about it... when the owner chucked most of his shares... how much was Gamuda?

Ah... yes... Gamuda did rebound.. but compare then and now ( and do note that the market is currently trading at its peak)....