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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » Averaging, what?, why?

Averaging, what?, why?

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1Averaging, what?, why? Empty Averaging, what?, why? Tue Oct 30, 2012 4:51 pm

zen

zen
Manager - Equity Analytics
Manager - Equity Analytics
Averaging is where you buy high and again buy lower to bring your average cost of that share down. Why do we do it? Simply because we don't want to see red in our portfolios and don't like to admit that we were wrong.
The opportunity cost of averaging is missing the chance of investing in a share that would give higher returns, specially in today's slightly bear market.
As an example, suppose someone bought 100 GREG @ 60 last year. He averaged @45 level with another 100 and averaged @ 15 with another 100, which I'm sure that many people have actually done. The average cost of 300 GREG for him now will be Rs.40 and his loss as of now will be 62.50%, assuming GREG is now at Rs.15. It'll take atleast a year for him to get any profit. On the other hand, suppose he bought 100 GREG @ 60 and not trying to averaging, bought
3000 FREE @ 2 (same amount of money he used to average GREG), and sold at 3 ( FREE actually went from 1.40 to 3.30 so we are not talking about timing the market perfectly), today he would have Rs.9000 cash and Rs.1500 worth GREG which is actually a 12.5% loss from his whole investment. (1500/12000).
The bottom line is that averaging just for the sake of seeing a little bit less red is useless. What must be done is to buy the share that you think is best from the whole market for your investment plan,
not trying to salvage the sunk cost of your previous wrong decision and cut off losses, if you can overcome your ego.
True story - At the time I started investing, a friend of mine got SHL from the IPO. Told her to sell at Rs. 25 a countless times but she didn't. She said she'll never ever sell any share at a loss ever. Recently she averaged it but still in a massive loss with no hope making a profit in the foreseeable future.
This is just my view. Contrary opinions, more examples and counter arguments are all welcome.

2Averaging, what?, why? Empty Re: Averaging, what?, why? Tue Oct 30, 2012 5:45 pm

troy

troy
Moderator
Moderator
I learn some thing from this. But only issue is in practicing what I learnt.
Always fall in the trap with averaging with a huge opportunity cost.

3Averaging, what?, why? Empty Re: Averaging, what?, why? Tue Oct 30, 2012 5:59 pm

smallville

smallville
Associate Director - Equity Analytics
Associate Director - Equity Analytics
1000% correct.. Averaging should not be done more than 1-2 times when the share u bought falling.. When we dont know the end, keep on averaging makes it a foolish thing..

4Averaging, what?, why? Empty Re: Averaging, what?, why? Tue Oct 30, 2012 6:15 pm

SL.Market

SL.Market
Vice President - Equity Analytics
Vice President - Equity Analytics
@smallville wrote:1000% correct.. Averaging should not be done more than 1-2 times when the share u bought falling.. When we dont know the end, keep on averaging makes it a foolish thing..

Most are wrong they think overall after averaging. I will not wait selling price for whole lot. But think the reason past lot and realize the profit.It will be automatically reduce your loss as well as one day you will end up with profit. The most important thing is to be patient, identifying entry/exit points and not going fake rallies.
I will not not give up and you also need not to do. There should be end to ups as well as drops. The most loyalty players for any counters will be surely rewarded.

Good Luck

5Averaging, what?, why? Empty Re: Averaging, what?, why? Tue Oct 30, 2012 9:04 pm

smallville

smallville
Associate Director - Equity Analytics
Associate Director - Equity Analytics
In averaging, different ppl follow different strategies;

1. Some dont care the avg value and they sell when the share appreciate abt 10-20% then buy back when the selling pressure is diminished. They do this several times and the profit they make in doing this could compensate the loss of buying the same share at a considerable high. So they could forget the earlier shares even existing Wink

2.) Some avg down and sell a part of the holding. This may, however not carry any value towards the overal loss but the loss can reach a min level due to the addition of new shares at a lower price and sell of the same at a higher price.

The irony is; for counters like GREG, applying this method may be a chaos.. As it was 100+ in 2011 and going at 15 now.. Say if somebody bought this at 60s, still the price is 1/4 of it. And how many oppertunities it had privided with 10-20% rises? Only abt 3 in the recent past which I dont think could be enuf to cover the loss of buying at 60 Wink

Just my thoughts.. There are several members who had expressed their strategies in different threads where they shared how they managed to stay alive in this bear period..

6Averaging, what?, why? Empty Re: Averaging, what?, why? Tue Oct 30, 2012 10:19 pm

wmdcf

wmdcf
Manager - Equity Analytics
Manager - Equity Analytics
I think it doesn't matter If we can record it separately.
If I bought GREG in 60,45 and 15 levels in 100s my avg price = 40.
If I can sold 100 @ 25, my profit for that lot(15) is = Rs.1000 (2500-1500)
But at the same time my avg may shown as 40. (not sure, but in CDAX, yes ). But actual avg is = (Rs.52.5 ((6000+4500)/2))

May be I'm 100% wrong. Just want to share my idea Smile

7Averaging, what?, why? Empty Re: Averaging, what?, why? Tue Oct 30, 2012 10:27 pm

zen

zen
Manager - Equity Analytics
Manager - Equity Analytics
@smallville wrote:The irony is; for counters like GREG, applying this method may be a chaos.. As it was 100+ in 2011 and going at 15 now.. Say if somebody bought this at 60s, still the price is 1/4 of it. And how many oppertunities it had privided with 10-20% rises? Only abt 3 in the recent past which I dont think could be enuf to cover the loss of buying at 60 Wink
Actually it's even worst than that because even for the whole investment (initial investment + later averaging) to break even you need a 300% increase in the price. Isn't it better to leave the already sunk cost and invest in a company that would make the 300% growth more quickly and more surely? The problem with a share like GREG is that it won't happen automatically. You have to wait till someone else decides to push it up.

8Averaging, what?, why? Empty Re: Averaging, what?, why? Tue Oct 30, 2012 10:39 pm

zen

zen
Manager - Equity Analytics
Manager - Equity Analytics
@wmdcf wrote:I think it doesn't matter If we can record it separately.
If I bought GREG in 60,45 and 15 levels in 100s my avg price = 40.
If I can sold 100 @ 25, my profit for that lot(15) is = Rs.1000 (2500-1500)
But at the same time my avg may shown as 40. (not sure, but in CDAX, yes ). But actual avg is = (Rs.52.5 ((6000+4500)/2))
I suppose if you treat them as separate investments it would be ok. Like you said GREG is fine from 15 to 25 or 30. You can cover the first 100% loss at Rs. 30 and get the balance 200% profit from another share.

9Averaging, what?, why? Empty Re: Averaging, what?, why? Wed Oct 31, 2012 3:34 pm

Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
Possible read these links.
http://forum.srilankaequity.com/t6611-averaging-the-buy-price-to-minimize-risk-a-common-mistake-of-stock-traders?highlight=averaging

http://forum.srilankaequity.com/t13684-the-safer-way-to-average-down?highlight=average

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