Joseph Wang Financial - Is It Correct To Average Down?
Average, or pyramiding, low is to buy more shares of a value that already has at prices below that made the initial purchase.
Do it right or not depending on the value and the strategy that uses the inverter.
I think when you trade should not be averaged down ever. It is a fatal error. If an operation does not evolve as expected at the time of opening should not commit more money on it. Money management and estabecimiento a maximum loss on each trade must be strictly observed. It is better to take a small loss and think about other operation that persist in being right and in danger of having to assume a greater loss.
When investing in the medium / long term we must distinguish two cases:
Averaging down to try to fix a bug: It should not be carried out. It is a case similar to the trading. If we were wrong the first time is better not to add more money into an investment that is not working as expected. Each new investment is something independent, new money should not be used to correct old errors. Do not engage in an operation goes well at all costs. It is best to assume the errors, even assuming a loss, to continue putting more money into a company just to refuse to recognize a mistake. It is relatively common in the case of an investor who buys a horse mackerel (Jazztel, Terra, etc.). hoping to obtain a high yield. Which is something that can actually happen, if correct in the time of purchase, because if a small company with problems in your business is able to straighten their course performance can be much higher than those obtained in a solid company. But these businesses are very risky and you can also lose money. If the company starts to fall for the investor it appears the temptation to buy "cheaper" to recover their investment before. The problem is that the company is lower, but that does not mean that it is cheaper. If the business of the company has worsened its price may be lower, yet is also more expensive. A business is not always cheaper because its price has fallen and more expensive because its price has risen. Low and cheap are not the same thing. As high and expensive either. You can agree that a company is cheap and low (or high and expensive), but not always. Depends on business performance and business results. In these cases we must carefully examine the situation of the company to decide whether to sell, assuming the corresponding loss or maintaining the investment. But in no case should be increased investment. Usually the money is recovered before assuming the loss and invest in other more solid value in your business.
Averaging as a deliberate strategy of entering a value: In this case it is right to do so and it is a good strategy. You can not do with any value, but only with very solid whose profits and dividends have a sustained upward trend and, above inflation, over time. In this case what is sought is a temporary diversification. Suppose an investor believes that a company with the characteristics mentioned is cheap at 10 euros, but without being a bargain irresistible. As the prediction of the contributions is very difficult the investor can not be sure whether the company will contribute in the coming months even cheaper prices or not. Consider that 10 euros is an acceptable price that worth looking into but do not rule out lower prices and are sure you will see them. If you have 20,000 to invest in that value and invest EUR 10 may in a few months the value has fallen and no money left to buy more.
This assumption is correct averaging, buying only 5,000 euros to 10 euros (for example) and leave the rest to await possible falls, setting (for example) would buy another 5,000 euros if it gets to 9 euros and the last $ 10,000 if the price drops to 8 euros. It is very important to note that in this case is designed piramidacin before making the first purchase, and thus before the contribution drops below the first price. Intentanto is not correct an error, taking money from under the stones, but you are designing a step input of the amount spent to invest in that value. If the value does not reach down to EUR 9 or 8, the excess liquidity will be waiting to find another investment opportunity, and the initial purchase, the second purchase or EUR 9 shall be complete at a very close to the minimum by the value.
by: Joseph Wang
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