This question came from a reply to a recent article. "has averaging down worked out for you in the past?"
The simple answer to the question is generally not! It is not easy to give an unequivocal yes or no. It all depends. We all have our own set of excuses or scenarios.
Let us use an imaginary company for illustration purposes.
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e.g Knock Knock plc Buy 3,000 shares @ 200p in May Buy 3,000 shares @ 150p in late June Buy 5,000 shares @ 80p in October Average Overall Purchase Price 132p |
Six Months Later
The Knock Knock share price makes its way down to 40p. The share price from the moment you bought it always seems to find a lower level. You fill up with regretful remorse at each new lower level. The same investor after months of agonising eventually gives up. He sells out at 28p and curses his/her misfortune. The selling of these type of stocks is always difficult as we feel we deserve for the share to bounce up soon!
A Piece of Luck
An investor can sometimes get out lucky when a share price you own falls hard and fast. You catch the fall at a low point of the day with an additional purchase. The share price spikes up again within 48 hours temporarily, rather like a drowning man trying to catch the last gulp of air. The brief rise in the share price gives the investor one last chance to break even. Not really a recommended strategy. e.g Cloudtag plc or many small mineral and exploration stocks on AIM provide plenty of examples.
Large Interval Drops
In the second scenario, the share keeps on dropping down at intervals in large percentages often spread out over one, two or three weeks. The investor initially double downs at the lower level and often once more again doubles down at another new share price low for good measure.
The initial satisfaction comes from the lower overall average purchase price. He/She thinks how foolish the rest of the market to miss this glaring opportunity. The shares are simply oversold. Ultimately, the financial losses suffered by the investor are far greater than might have been suffered …
