I started serious Investing Journey in Jan 2000 to create wealth through long-term investing and short-term trading; but as from April 2013 my Journey in Investing has changed to create Retirement Income for Life till 85 years old in 2041 for two persons over market cycles of Bull and Bear.

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Sunday 29 July 2012

Average Down or Pyramid Up? (2)


Read?   Average Down or Pyramid Up?

Average down???

This is one of those areas in investing that Uncle8888 will has strong opposing view when he is approached for his view.


"A superb intellect is worth little in investing if you have the wrong temperament. Most investors get led astray by emotions. They get excessively care-less and optimistic when they have big profits. They get too cautious and pessimistic when they have big losses.... I've always worked on having more self-control.” - Sir John Templeton


Why???


Retail investors' big losses will not come from their single large position but usually they will lost them over a series of averaging down.

They may keep thinking that the market is wrong. They will be right over long run.

But, the truth is ........

Once they have big losses, they will do what Templeton has said: "They get too cautious and pessimistic when they have big losses...."


By being too cautious and pessimistic, some retail investors may eventually switch to more conservative investing strategies that will hinder or slow down their progress towards their own investing goals.

"A superb intellect is worth little in investing if you have the wrong temperament. Most investors get led astray by emotions." - Sir John Templeton

So don't let your emotions lead you astray by your big losses.


You still want to debate over average down???






9 comments:

  1. Buying pyramid down is very dangerous because you never can be sure the stock you choose will be still around after the falling knife kill this current Bear.
    Pyramid up buying the same stock seems to be safer because the market should knows something more than you do.
    So buying down 1,2,3,4,5. is actually the same as buying up 5,4,3,2,1. theoretically, (assuming you achieve buying up and down symmetrically) yet all investment books frown on the former and encourage the latter. Why?
    Maybe some one can understand from a different angle, like to share?
    Anyone like to share your view on the above theory ?

    i think buying up as the price go higher and higher is psychology more difficult for some people.
    i have yet to overcome this weakness of mine. Even though it seems buying something increasing in value is better than the other way round.
    But it's the same stock for the long run, really is there any big difference Pyramid up buying or Pyramid Down buying? (Assuming you achieved buying up and down symmetrically).

    ReplyDelete
  2. Temperament,

    There is a difference between scaling-in and averaging down.

    Let's assume we have a $100,000 portfolio - 50% vested; 50% cash.

    If you wanted to build up a $50,000 position in a stock for the medium and long term, then scaling in with 1,2,3,4,5 and 5,4,3,2,1 is not much difference. You have the humility you can't bottom-pick - so you "scale-in".

    But if you already have a $50,000 position for this stock, then an unplanned averaging down of the balance $50,000 cash - just because you want to average out (or dilute out) the recent losses to make you "feel better" - it's a different ball game!

    3 things can happen when our frame of mind is out-of-whack (headless chickens):

    1) Capitulation - Those who can't stand the pain anymore during March 2009 and sold out would have missed the eventual recovery...

    2) Switch strategy mid-way - Imagine switching to "defensive" stocks during March 2009 and under-performing the "riskier" cyclicals during the upswing...

    3) Even if you spot a value or growth buy of the century during March 2009, well, you don't have bullets liao... Would miss the $50,000 cash you averaged down in panic?


    It our frame of mind that Sir John Templeton and CW8888 alluded to:

    "A superb intellect is worth little in investing if you have the WRONG TEMPERAMENT. Most investors get led astray by EMOTIONS." - Sir John Templeton


    I think better when my portfolio is in the money. This way I won't have to worry about "getting even".

    LOL!

    ReplyDelete
  3. i think at the end of the day, the stock you going to buy in Bear market must be chosen even more carefully. Whether you are going to value-average buying down a new stock or the stock you already heavily invested.
    Anyway, i have yet to try value-average up. i think i will do it this time; when the time to buy comes around in Bear Market.
    If i don't do it, i won't know which is really better for me.

    ReplyDelete
  4. If the stock is having strong fundamental, but the price is beaten down due to mr. market bad mood and the overall bull trend still intact; I will accumulate more shares slowly. Best is buy after the price has reverse from downtrend to upstrend.

    Why? When the price has drop further it means that the margin of safety is higher and thus risk will be lower.

    ReplyDelete
    Replies
    1. Even the stock you choose is "strong fundamentally' in a Bear Market, the most disadvantage of value-average down is you never can tell when the falling knife is going to land.
      You may run out of "bullets" before the battle is over.
      On the other hand, if you wait for the "downtrend" to turn "uptrend", you may have missed all the best time of buying at or near "bottom prices".
      The latest GFC Bear Market was an example.
      Many of us thought the "falling knife" had landed in 2008.
      Yet actually it landed in March 2009.
      And it caught many by surprise (me included), by 2010,2011 market has turned around.
      So really, no one really will know when is a severe downtrend has actually turn uptrend.
      So, it is O. K. (for me) to always B/S too early as long as you make some money.

      Delete
    2. Yes, all stocks will tank during Bear Market, including super blue chip or strong fundamental stocks. When the overall market turn bearish (dead cross), I will sell all my stocks. When market reverse to bullish (Golden Cross), I will buy those stocks with strong fundamental stocks.

      Yes, cacthing falling knife is dangerous. However, when the knife has fall to the ground and resting there for sometime (1 to 3 months), its time to pick the knife. It won't hurt you now. This is the period where most selling has completed, and most buyer still stay at the sideline. The volume is low and price goes sideway. Buy when most feel pessimistic.

      Well, the above strategy serve me well.

      Delete
    3. Quote (From RayNg)
      "However, when the knife has fall to the ground and resting there for sometime (1 to 3 months), its time to pick the knife."
      Unquote:-
      Can you show which period in 2008 or 2009 is what you claim above.
      Resting there for sometime for 1 to 3 months???? May i know which 1 to 3 months? Maybe i misunderstood your language? Can you explain with a real example?

      Delete
    4. Hi Temperament,

      OK. BreadTalk(5DA) price was tank together with all stocks during the 2008 crisis. It fell from the high of $0.60 to $0.25 (58% down). The price stabilize at around $0.25-$0.26 from Oct2008 to Mar2009. So the knife was resting at this zone for more than 3 months with low volume. There was plenty of time for me to pick up and accumulate the shares.

      BreadTalk fundamental (2009): ROE was 18; PE 6.5; and EPS still growth despite during the 2008 financial crisis; Positive Cashflow, etc...

      Delete
    5. O. K. Will you show the actual daily chart of what you claim.

      Delete

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