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Averaging down
deadpoet
#1 Posted : Tuesday, December 04, 2018 3:16:33 PM
Rank: Member


Joined: 9/27/2006
Posts: 402
Is averaging down a good strategy, or is it simply a case of throwing good money after bad?

For argument's sake, let's say someone bought NBK at 8 bob but now its down to 5.50. Would that person be right in purchasing more at 5.50 to lower the average buying price to around 6.50? This way, he or she can at least get out easily if and when the price rebounds to, say, 7 bob.

Let's not discuss company fundamentals in the example above. Assume a speculative trader.

Has anyone managed to average down successfully?
S.Mutaga III
#2 Posted : Tuesday, December 04, 2018 3:22:56 PM
Rank: Member


Joined: 3/26/2012
Posts: 749
deadpoet wrote:
Is averaging down a good strategy, or is it simply a case of throwing good money after bad?

For argument's sake, let's say someone bought NBK at 8 bob but now its down to 5.50. Would that person be right in purchasing more at 5.50 to lower the average buying price to around 6.50? This way, he or she can at least get out easily if and when the price rebounds to, say, 7 bob.

Let's not discuss company fundamentals in the example above. Assume a speculative trader.

Has anyone managed to average down successfully?

- Averaging down is a bad idea for speculators/traders, because they ignore fundamentals. Therefore, there is the risk of sinking money into a black hole.
- Averaging down is good for investors because they use fundamentals and have a long/medium term investment horizon. This gives their investments enough time to bottom and turn around (pricewise).

Therefore, in the above case, it is a bad idea for the "trader/speculator" to average down.

Personally, I prefer "investing" in stocks (because fundamental analysis is possible), and "speculating" on commodities (because there are no fundamentals, just demand and supply forces).
A successful man is not he who gets the best, it is he who makes the best from what he gets.
deadpoet
#3 Posted : Tuesday, December 04, 2018 3:42:11 PM
Rank: Member


Joined: 9/27/2006
Posts: 402
Good points above.

However, company fundamentals seem to change unpredictably on the NSE. NBK could be merged with another bank unexpectedly for example. ARM fell rapidly, and Bamburi has somehow found a way to stop making billions each year. KPLC cooked its books or something... the list goes on.

That's what prompted me to ask.
Ebenyo
#4 Posted : Tuesday, December 04, 2018 6:47:42 PM
Rank: Veteran


Joined: 4/4/2016
Posts: 1,436
Location: Kitale
[quote=deadpoet]Good points above.

However, company fundamentals seem to change unpredictably on the NSE. NBK could be merged with another bank unexpectedly for example. ARM fell rapidly, and Bamburi has somehow found a way to stop making billions each year. KPLC cooked its books or something... the list goes on.

That's what prompted me to ask.[/quote
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Averaging down is a good strategy for both capital gains and dividends targets.
Towards the goal of financial freedom
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