Daryl Guppy's Selected Newsletter Issue 32

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Dear Readers,

 

 

READERS QUESTIONS - AVERAGING DOWN DISASTER 

By Daryl Guppy

SUBJECT SUMMARY

 

AVERAGING DOWN
 

This is usually called a losers strategy. Investors are encouraged to buy more shares when prices fall because they are cheaper.
This thinking is also part of the popular Dollar Cost Averaging strategy which is very dependent upon exact timing for success. The averaging down 
 strategy has an appealing logic. If we buy 10,000 shares at $1.00 each we spent $10,000. In this trade our breakeven point is $1.00, and
perhaps our profit target is $1.10 for a 10% return.

 

Prices fall to $0.50. If we buy at this level we increase our position size for a lower cost and we also lower the breakeven point. If we spend
an additional $5,000 we get  10,000 shares. Our total shareholding is now 20,000 shares for a cost of  $15,000. The average cost of our
shares falls to a breakeven point $0.75.
 

The strategy works only if prices rebound and in a bear market this is a low probability outcome.

 

 

 

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The continuing disaster in Japan will drag down world markets. It will impact heavily on 

 

 

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Martin Wong

Trading Coach

Investmatic Management, SoHo, Ara Damansara, Selangor DE, Petaling Jaya 47301, Malaysia


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