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Averaging down
Rank: Member Joined: 9/27/2006 Posts: 505
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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?
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Rank: Member Joined: 3/26/2012 Posts: 830
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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.
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Rank: Member Joined: 9/27/2006 Posts: 505
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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.
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Rank: Veteran Joined: 4/4/2016 Posts: 1,997 Location: Kitale
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[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 ......................................................................................................................................................... Averaging down is a good strategy for both capital gains and dividends targets. Towards the goal of financial freedom
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Rank: Elder Joined: 6/23/2009 Posts: 13,907 Location: nairobi
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S.Mutaga III wrote: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). Wisdom
COOP ABP 15.85; IMH ABP 35.55; KQ ABP 5.75; MTN ABP 5.20
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Rank: Member Joined: 7/1/2009 Posts: 269
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obiero wrote:S.Mutaga III wrote: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). Wisdom Unless you are aiming for a seat on the board like Kibunga's play for Kakuzi, averaging down doesn't get you the best returns over the long term....a lesson gleaned from @VVS. I look at the prevailing fundamentals for each individual transaction.
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Rank: Elder Joined: 6/23/2009 Posts: 13,907 Location: nairobi
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Monk wrote:obiero wrote:S.Mutaga III wrote: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). Wisdom Unless you are aiming for a seat on the board like Kibunga's play for Kakuzi, averaging down doesn't get you the best returns over the long term....a lesson gleaned from @VVS. I look at the prevailing fundamentals for each individual transaction. It is about knowing the value of the share you are purchasing. Consistently building up the quantity held, in as long as you purchase below NBV/fair value. Look at DTB
COOP ABP 15.85; IMH ABP 35.55; KQ ABP 5.75; MTN ABP 5.20
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