Never average down
This is a rule that I have read in more than one book. And I think it is a very good one.
After averaging down with Vodafone in my mortgage portfolio I now find myself in the unfortunate position of having over 30% of my portfolio tied up in this underperformer. So even though Tesco zoomed up over 3% on Friday my portfolio only gained 1% as Vodafone went down (again!)
Back in November when I bought a load more VOD at 130p I was sure it would only be a matter of weeks before it returned to 140p and I was certain of a quick 5%. However I guess you always have to be aware of the possibility that you may be wrong.
In this case I was very wrong and VOD is still bouncing around at rock bottom at 116p. To compound the agony, BAA, the company I sold to fund the VOD purchase, have recently jumped up on bid speculation. A case of wrong place at the wrong time.
Fortunately at this stage of my investing career I can afford to make a few mistakes as long as I learn the lesson.
So lessons learnt - averaging down is very dangerous, and no more rushing in as soon as the price dips.
posted by Phil @ 8:30 pm
2 comments
2 Comments:
Phil, I don't at all agree with your philosophy here.
Subject to watching your portfolio concentration of course (yes, 30% is probably too much for most people/situations) - so long as your fundamental analysis is correct and remains intact, then averaging down IS the right thing to do.
I've done it many times to wonderful profit - yes, it's hard to watch the market pound your beloved investment thesis, but so long as you've analyzed the situation correctly, and it has low/favourable valuation metrics, then, as one "deep value" mutual fund manager said "We'll keep averaging down till the stock is delisted."
Jay Walker
http://confusedcapitalist.blogspot.com
I take your point Jay but I still think that averaging down is a dangerous thing to do. I agree that if you are absolutely certain of your assessment of a company's value then it may make sense but how often can you be absolutely certain that your assessment is correct?
There are many thousands of stocks to choose from so I think for an amateur investor it makes more sense to choose another company for a bit of diversity than plough good money after bad.
Post a Comment
<< Home