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Hi Bob:
The point about averaging down is it's an alternative to another way of
trading, which is:
To buy the stock you have in mind ALL AT ONCE.
In averaging down, you just don't go ad lib. You have to evaluate the
fundamentals of the stock in mind. It's unfortunate that SUPC turned out
to be the way it was - fraud ? (maybe or maybe not)
If you intend to spend $10,000 to buy SUPC, you can either:
1. buy all at once, using up all your $10,000, or
2. buy by parcels of your total $10,000 (e.g., 3,5000; 3,500; 3,500) -
i.e., averaging down.
If the stock goes up after your 1st purchase, you will not make so much
money in # 2.
If the stock goes a long way down, you'll probably have bought all 3 (or 4
or 5, depending) times per # 2.
If the stock continues to go down afte you've used up all your money per #
2, you lose.
On the other hand, if the stock goes up somewhat after you've used up all
your money per # 2, you maky be break-even.
If the stock goes back to your 1st purchase price after you've used up all
your money per # 2, you may make double.
If the stock goes up very, very high after you've used up all your money
per # 2, you make a lot more than buying per # 1.
Ultimately, the choice of stock is of the upmost importance.
Unfortunately, there may be cases like SUPC.
After all, averaging down is only one component of a "workable" (if the
term "successful" is not your first choice) trading strategy, which at
least includes these:
1. a friendly (bullish) environment)
2 choice of fundamentally-sound stock
3. adequate timing for your 1st purchase, preferrably after a good
retracement from recent highs, and
after the stock has reached an oversold area, and showing signs of
bottoming out
4. buying in successive parcels, rather than just one lump sum one time only
5. reasonable "down" intervals (i.e., not just any 2 cents down or 0.00002%
down) for averaging down
6. patience (could be a very long-term waiting game)
7. luck (yes, luck plays a significant element sometimes - for example, if
you've evaluated 10 good
stocks and you've filtered out 8, and you've money for only one, it may
happen that the one you
finally pick goes belly up, whereas the one you don't choose goes way up...)
8. if you can, diversify into more than 3 or 4 different stocks, hopefully
of different sectors
Regards,
Wong
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At 01:42 PM 04/15/2000 -0400, BobsKC wrote:
>I averaged down on SUPC last year .. It had fallen about $10 to the high
>30's when I entered.. fell to 30 so I bought another K and then to 20 where
>I added another K. This company had great earnings and was in the business
>of hospital management which to me, was a growing field and was desperately
>needed in America. Two days later, the company reported irregularities in
>their books before the open and it opened at $10 as I recall. Just a note
>about an averaging down nightmare. The company knew, the employees, (to
>some degree), knew and who knows how many employee friends and relatives
>knew? I'm not saying that all averaging down is a bad thing but one needs
>to clearly understand the reason for a fall in price and if you don't, stay
>clear. (At least that's my new motto)
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