To my faithful horde of followers, yes all three of you, I have neglected this blog of late while watching my beloved Blue Jays advance in the playoffs. Alas now that they've been eliminated by a better (and I must say classier) team in the Cleveland Indians, I will once again get back to sharing my thoughts and ideas on a more regular basis.
One last note on baseball, I am still a big fan of the Blue Jays, but my regard for one Jose Bautista has fallen considerably. His remark about the young Cleveland starter Merritt, who pitched 4+ brilliant innings to start game 5....Bautista's comment was totally lacking in class. Jose said the young lefty would be shaking in his boots at the prospect of facing Toronto's vaunted line up. Cleveland took the high road after taking the ALCS, they didn't rejoice in making Joey Bats eat his words, instead they wisely said they don't pay attention to that kind of stuff.
That's what winners do, they let their actions do the talking and its why I'll be rooting for the Tribe.
But now onto the topic at hand, about averaging down and whether or not its a good idea. As with so many things in life, it depends. For anyone who might be unfamiliar with the concept of averaging down, sometimes called "dollar cost averaging", its really pretty simple. Say you buy 1,000 shares of a stock trading for $15, costing you $15,000 total. That same stock then falls all the way to $10. So you invest another $15,000 at $10, but now you buy 1,500 shares. Now you own 2,500 total shares and your average cost is $12.50....if the stock makes it back to that $15 price you first bought in at, then you're making money...at least on paper.
The devil though, as often happens, is in the details.
If you're going to average down on a stock I would suggest you better be very confident in the prospects for the PPS to recover. Is it a profitable company? Are you receiving dividends? That's not to say that averaging down a speculative investment isn't a good idea, its something I've done successfully in the past myself, but it is something that requires staying on top of things in my opinion.
Firstly, did you buy the stock at a time of heightened excitement, with lots of news and heavier than usual volumes trading? If that is the case, then averaging down might not be a good idea. If a stock is falling in spite of bullish news and increased trading volume, it could be an indication that while the retail herd may be excited and buying, that there are other players who are obviously selling the shares being bought. And those sellers might just have a better gauge on the future direction than the retail herd.
From where I sit there is no "one size fits all" solution to determine when averaging down makes sense, no ABC checklist to follow. But as a general rule I do think its best to try and gauge how the market is affecting the psychology of retail players. I am a contrarian at heart, and that means running in the opposite direction away from the retail herd. If volumes are high and the news seems good, but the PPS of a stock is heading south, then I will ignore the advice of those who advocate averaging down.
Now, to bring this back to baseball and tie it in. I am a fan of the game of baseball, I loved playing the game and I love watching it. But I'm mostly a fan of the Blue Jays, its the team I grew up with. I know the players and their histories, with other teams not nearly as much. But while I'm a big Jays fan I'm not blind to the negatives, like that crack Bautista made about Merritt, the young Cleveland pitcher.
Some people will fall in love with a company and its stock, and anyone who disagrees is an enemy. The same as with sports teams. But keeping perspective will allow you to keep a discerning eye when a company you love does something that perhaps you shouldn't like. Maybe its paying to get noticed by hiring stock promoters, or maybe its putting out fluffy PRs which are filled with hyperbole and future looking promise but nothing of material importance in the here and now.
Enjoy the World Series folks, and whether its Cleveland or Chicago it will be nice to see a futility streak end.
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