Tagged: averaging down
Lee SaundersParticipantFebruary 5, 2021 at 9:53 AMPost count: 49
I understand that averaging down is to catch movement as it retraces lower, but KHC is below all of those.
Is it okay to create buy orders to execute as it goes up as well (average up)? It seems like the same thing to me because the price is the same.
Thanks.Scott PearcyParticipantFebruary 5, 2021 at 9:59 AMPost count: 490
When we average down on a particular Logical Investor stock pick, we are allowing the movement of the market, and our subsequent purchase at the lower price, to reduce the average cost per share of that pick. If you were to buy as the market rises, you negate the effect of averaging down and take on more risk. The overall effect would be to reduce the net gains accrued as the stock price rises above our new lower break even point…Averaging up makes that break even point higher thus reducing our profit when we decide to sell the position….Sean HymanKeymasterFebruary 5, 2021 at 10:07 AMPost count: 6969
Spot on, Scott! Thanks for helping out.
We never average up, thus increasing breakevens in our stocks and reducing future profits. Rather, we only average down to reduce our breakevens. Any time we add money to a position, it needs to provide some edge/benefit to us. So, we only average down after wide percentage moves lower.Lee SaundersParticipantFebruary 5, 2021 at 10:19 AMPost count: 49
Thank you Scott and Sean, I get it.
Following on from that, creating an initial buy below all of the averaging down levels if already there, and then averaging down from there would follow the rules but at lower prices, right?Sean HymanKeymasterFebruary 5, 2021 at 10:25 AMPost count: 6969
In the case where your entry starts far lower than ours, you’d make sure that your 2nd and 3rd tranches were invested at least 10% apart, in price, from each other.Lee SaundersParticipantFebruary 5, 2021 at 10:35 AMPost count: 49
That makes sense, thank you.
Some of the portfolio entries are a couple of years old, and price is back to or below those buy points.Sean HymanKeymasterFebruary 5, 2021 at 10:44 AMPost count: 6969
Correct. Our average holding time is 2-4 years. Some will be less, some will be longer.
We never know where “bottom” is but we enter at fundamental points of value and we have wide averaging downs. Even still, we may or may not be at or near the bottom BUT, we’ve established a position at a point of long-term value and those stocks work out of those value positions over time into a state of fair value or overvaluation.
So we buy strong companies on the cheap. Average down to take advantage of downtrends to get even lower pricing. Then we wait/patience. The market determines the speed with which it comes out of that state of value because it depends on how quickly large institutions see what we see and start moving into it. Sometimes they see that quickly. Sometimes they do not. But stocks don’t stay values forever. They go back to fair value and even a state of overvaluation, in time.
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