When is it Ok to Average Down?

Just remember one thing…

…that the words “averaging down”…

…only go with long-term investing. 

They do NOT go with trading. 

After you have fully digested and understood the above, let’s to to the when. 

When does averaging down go with investing?

The answer to this is – only after doing proper homework. 

If you’ve not researched the underlying well enough, don’t even think about averaging down, because you could be throwing good money after bad. 

When there’s a correction, the long-term investor does get tempted to increase his or her holding, because of the lucrative prices that are on offer. 

Sure, why not?

Please understand, that this “sure, why not” is coming out so casually because of course the long-termer has worked overtime to arrive at the conclusion that he or she wishes to increase his or her stake in something that is already being held. 

The fall in the price of the underlying does not perturb the long-termer. Solid research has been done, and the markets make huge mispricing blunders when in free fall. Market players go all psycho and discard their precious holdings at throw-away prices. Picking up quality stocks at bargains is exactly what the long-termer is in it for.

The long-termer has done a few more things. 

Family has been secured with multiple income-sources and emergency funds. What’s going into the market is sheer surplus, not envisaged to be required over the next ten years. 

Then, entry quantum is small each time, small enough so that entries can be made all year round, and there will still be ample savings left after all entries. 

How does one calculate a small enough entry quantum that satisfies all of the above criteria?

One works backwards. 

Pinpoint your income after tax for the year.

Decide what you wish to amply save. Subtract this from your income. Further, subtract expenses. You are left with an amount. Decide whether all of this amount can go into the market, or whether only a part. Maybe you wish to go for a holiday with your family, or perhaps you wish to buy a vehicle, or what have you. Subtract such additional expenditure too. Finally, you are left with the amount that you wish to plough into the market, over the course of the year. 

Next, take the amount, and divide it by 30, or 40 or 50. 

Why?

On the down-side, the market could offer you margin of safety on 30 of the days that it is open in the year. On the up side, the number could be 50. We are talking about ten-year average numbers. During a singular correction, the market could offer margin of safety continually for the whole year. Decide what your magic number is. 30-40-50 days per year works ok over a ten year period. Divide the amount you’ve set aside with the number you’re comfortable with to arrive at your entry quantum per entry-day, for the year in question. Now you can keep going in with this same quantum through out the year whenever margin of safety is offered, and you generally won’t have to worry about running out of investing money, on average. 

Great stock-picking, excellent due diligence, surplus going in, small-enough entry quantum, ability to sit – the long-termer is armed with these weapons, and now, he or she can average down as much as desired, whenever margin of safety is offered.  

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Resisting the Devil’s Lure

The lure is tremendous. 

It’s flashy. 

It’s in the limelight. 

It’s happening. 

It wants to take you for a ride. 

It’s called Crypto.

There’s talk about “it’s the internet of the future”. There’s talk about how there’ll be no governments and how people will rule over their own currency. Enough to sweep one away. 

However, cryptos go against the grain of everything a steady long-term investor stands for. 

Origin is unknown. 

Banks won’t store. 

Governments rejecting.

Legit?

Do you know the answer?

Main exchange went bust in 2014. Got hacked. 

Terrorist and launderers have found in them a smooth haven. 

How is one to understand Blockchain?

X number of people agreeing that the sky is purple – does that make the sky purple?

What about all the cousins?

There are many cryptos. 

There’s one springing up every few weeks.

Which ones are going to be around in 10 or maybe 20 years?

Yes, long-term investors think …

… long-term. 

Cryptos are making people taste fast bucks. 

Fast bucks made in a few days can spell disaster…

…because this is a trajectory that makes one want to bet the farm at the peak. 

Crypto players are being set up for something big. 

The amount of ammunition prevailing is enough to bludgeon lots. 

Pigs will get slaughtered. Always happens. Very few people in the world know how to trade. Let alone knowing how to trade, very few can even define what a trade is. 

Cryptos are a trade. Period.

That too, if one wants to trade cryptos.

Why wouldn’t one want to trade cryptos?

For starters, very high beta. Not many traders are comfortable with high betas. 

Stepping into the crypto world means stepping out of one’s area of expertise initially. 

Why would one want to step out of one’s zone? Circle of competence means a lot to successful traders. 

Diversification?

Have crypto on your plate, and the sheer hullabaloo will disturb your other trading. The one you’ve taken so long to build up. Do you want that?

No. I don’t. I’m happy in my circle of competence.

I don’t want the disturbance. 

I don’t want the extremely high betas. 

I don’t want to get slaughtered. 

I want origin. 

I want legit. 

I don’t want bust exchanges. 

I don’t want to make my computer a target. 

I don’t want to be doing what terrorists and launderers are doing.

I don’t buy the mining story. 

If the sky is blue, I want to have the freedom to call it blue, even if a billion people are calling it purple.

My common sense says no. 

Therefore, my exposure to cryptos is nil. 

I resist the devil’s lure.

Nath on Equity – make that a hundred

Long-term equity is 81). brought low.

The idea is to, if required, 82). sell it high.

Otherwise, 83). it is sold when you no longer believe in the stock concerned, for strong fundamental reasons. Or, it is sold when something more interesting comes along, and your magic number is capped. Then you sell the stock you’re least interested in and replace it with the new one.

84). Attitudes of managements can change with changing CEOs. Does a new management still hold your ideology-line?

Is the annual report flashy, wasteful, rhetorical and more of an eyewash? Or, 85). is it to the point with no BS? Same scrutiny is required for company website.

Your winners 86). try to entice you to sell them and book profits. Don’t sell them without an overwhelming reason.

Your mind will 87). try and play tricks on you to hold on to a now-turned-loser that is not giving you a single good reason to hold anymore.

If you’re not able to overcome your mind on 87)., 88). at least don’t average-down to add more of the loser to your folio.

89). High-rating bonds give negative returns in most countries, adjusted for inflation.

The same 90). goes for fixed deposits.

Take the parallel economy out of 91). real estate, and long-term returns are inferior to equity, adjusted for inflation.

92). Gold’s got storage and theft issues.

Apart from that, 93). it’s yielded 1% compounded since inception, adjusted for inflation.

Storage with equity is 94). electronic, time-tested-safe and hassle-free.

Equity’s something for you 95). with little paperwork, and, if you so wish it, no middlemen. In other words, there’s minimal nag-value.

Brokerage and taxes added together 96). make for a small and bearable procurement fees. Procurement is far more highly priced in other asset-classes.

One can delve into the nervous system of a publicly traded company. Equity is 97). transparent, with maximal company-data required to be online.

As a retail player in equity, 98). you are at a considerable advantage to institutions, who are not allowed to trade many, many stocks because of size discrepancies.

All you require to play equity is 99). an internet connection and a trinity account with a financial institution.

If you’re looking to create wealth, 100). there’s no avenue like long-term equity!

🙂

Patience and Nerves Anyone?

As someone I look up to put it recently – “It’s a game of patience and nerves!”

What is?

The stock-market. 

For whom?

The long-term investor. 

Do you have any?

What?

Patience, or nerves, or both?

You do?

Well, then you’ll do well in the markets, over the long-term. 

We look for complication. Meanwhile, we forget the basics. 

These are basics. 

If you’re not patient, you’ll for example jump into a stock at the wrong time, or you’ll jump out of it too early, or what have you. 

If you don’t have patience, well, develop it. 

If you can’t, do something else instead. Trade. Don’t long-term-invest then. 

If you cannot develop patience, you are not cut out to be a long-term holder. 

One method to cause the tree of patience to grow in you is to create the correct environment. 

Just don’t do anything that will make you jump. 

Invest your sur-sur-plus, money that is then pickled away, money that you won’t miss, yearn for or require over the very long-term. 

Go in with margin of safety. 

Stay in a stock you’ve singled out and entered until there’s a glaring reason to exit. Try to exit upon a high. This is the market. Highs are its nature. So are lows. That means that highs come. Wait for them to come, to exit from anything you need to exit from. 

Nervers, well, they come into play if you’ve not invested with margin of safety. 

I do remember two instances though, where everyone’s nerves were tested. October 2008, and March 2009. At these times, stocks sold for a song. Good ones and bad ones alike. Fear did the rounds, extreme fear. That’s what fear does. It creates once-in-a-lifetime opportunities. Take them. Maintain a clear head. Your nerves of steel will do that for you. Create an environment for your nerves to become strong. Or, perhaps expressed another way, create an environment where any weakness in your nerves is not required to show itself, and gets subdued into extinction. 

How?

Again, just go in with your sur-sur-plus. You’re not going to miss this money even if the sky is falling upon your head. And you’ve gone in with margin of safety. Your nerves will stay intact. 

Ensure your basics. Allow them to shine. 

The rest will take care of itself. 

Good investing. 🙂