The Power Of Averaging DownThere is a power of averaging down in which you can actually make a significant return with the stock only reaching the initial price you purchased it at.
Of course, many individuals chase "bad" investments (chasing bankrupted companies) and double down on incorrect choices or do not have the patience which is required for the math to work.
If you do believe you are on to something, you have the funds to take the risk (it will not keep you up at night and you will not be checking the ticker symbol every 5 minutes) and you have patience (may take months or years) averaging down might be a good strategy.
You need to check management, company strategy, industry, and several other factors.
In the examples below 1 has you never losing money and the 2nd the price only goes down until it goes back to the original amount. Which provide a better return?
Investment | Price Per Share | Total Shares Per Purchase | Cumulative Shares |
$ 100.00 | $ 10.00 | 10.000 | 10.000 |
$ 100.00 | $ 11.00 | 9.091 | 19.0909 |
$ 100.00 | $ 12.00 | 8.333 | 27.4242 |
$ 100.00 | $ 13.00 | 7.692 | 35.1166 |
$ 100.00 | $ 14.00 | 7.143 | 42.2594 |
$ 100.00 | $ 15.00 | 6.667 | 48.9261 |
$ 100.00 | $ 16.00 | 6.250 | 55.1761 |
$ 100.00 | $ 17.00 | 5.882 | 61.0584 |
$ 100.00 | $ 18.00 | 5.556 | 66.6140 |
$ 100.00 | $ 19.00 | 5.263 | 71.8771 |
$ 100.00 | $ 20.00 | 5.000 | 76.8771 |
$ 100.00 | $ 21.00 | 4.762 | 81.6390 |
$ 100.00 | $ 22.00 | 4.545 | 86.1845 |
| | | |
$ 1,300.00 | | Investment $ | $ 1,896.06 |
| | | |
| | | |
Investment | Price Per Share | Total Shares Per Purchase | Cumulative Shares |
$ 100.00 | $ 10.00 | 10.000 | 10.000 |
$ 100.00 | $ 9.00 | 11.111 | 21.1111 |
$ 100.00 | $ 8.00 | 12.500 | 33.6111 |
$ 100.00 | $ 7.00 | 14.286 | 47.8968 |
$ 100.00 | $ 6.00 | 16.667 | 64.5635 |
$ 100.00 | $ 5.00 | 20.000 | 84.5635 |
$ 100.00 | $ 4.00 | 25.000 | 109.5635 |
$ 100.00 | $ 5.00 | 20.000 | 129.5635 |
$ 100.00 | $ 6.00 | 16.667 | 146.2302 |
$ 100.00 | $ 7.00 | 14.286 | 160.5159 |
$ 100.00 | $ 8.00 | 12.500 | 173.0159 |
$ 100.00 | $ 9.00 | 11.111 | 184.1270 |
$ 100.00 | $ 10.00 | 10.000 | 194.1270 |
| | | |
$ 1,300.00 | | Investment $ | $ 1,941.27 |
Mentally, most investors\individuals cannot handle the 2nd option, even though they make more in a return.
It is research, math and patience; not emotions.
Giddy up,
Bold Forbes