Why buy more when stocks get cheaper?
There appear to be a number of arguments both for and against the practice of averaging down one’s stock position. Briefly, to average down means to purchase a second (third, fourth, etc.) position at a lower cost than what the initial position was purchased for. In other words, as the stock price goes lower you continue to buy more. In the mutual fund business they call it “dollar cost averaging.” The upshot is that at the end of the day, your “average cost” per unit is brought lower through the purchase of cheaper units as time goes on, which means that when (if) the units turn up again, your breakeven cost is lower than what it was when it was based only on your initial purchase price.
The age old question is, Is it good to average down, or bad? It probably depends on your time frame. Shorter-term investors / traders would never average down – how can you have a stop-loss if you’re buying on the way down? This is akin to trying to “catch a falling knife,” or bottom picking, and certainly goes against the entire thesis of momentum traders. Longer term investors would disagree – they would argue that if you believe the company’s fundamentals are strong, then why wouldn’t you jump at the chance to buy the exact same future upside potential at a cheaper near-term price?
Here to discuss the issue with respect to Vault Minerals Inc. (TSX: V.VMI, Stock Forum) are members of the Vault Bullboard, with posts below edited for clarity.
deadder: We need to be patient. I have also lost a lot but there is something we don’t know on this. Joe has bought a load and now one of his VPs is buying. The lower this goes the more I buy. No CEO would buy 5.9 million shares on a company that is not worth it. As he has stated, they are trying to buy an advanced property which should be positive. Joe also mentioned we should hear something about the Goldcorp drilling shortly. They met with them a couple weeks ago and budgets were to be finalized before they can communicate anything however he did indicate they are still very interested in the property.
… down 86% here but averaging down a lot lately.
Fastlane2: Why average down? What's the reason, and don't use the fact that Joe Horne is a major holder. There is no compelling reason to buy more of this company, when there are so many great juniors out there. The whole idea learned here from my own past practice is to diversify. I hope those of you who have invested here didn't bet the farm… As a shareholder you can't say you have a hunch or a gut feeling, because now you are gambling. I'm going to put these shares on the shelf as temporary retired money, because throwing more money at this company is totally insane.
