Buy on a dip and make big holding bigger??

Investment Analysis Clubs Saul’s Investing Discussions
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Question from a rookie investor: when you have a strong conviction in a current holding, one that you’ve even added to in the recent past, and it’s had a dip in price that makes you want to add some more, but it’s already a high allocation of your portfolio, whaddya do?

What wins out? Keeping one holding from exceeding a certain %? Or the strong conviction in the future of this holding and the buying opportunity? Do you stick to your guns or do you say, eh, a few more % won’t hurt, especially when this stock has a bright future and the current dip seems to be just noise? Plus what happens when that holding increases as expected? It will become even bigger, %-wise, assuming everything else remains the same.

And just to muddy the water a bit further, what if you know you’re going to continually add to the portfolio monthly going forward, which will also effect the % size of existing holdings?

Being a rookie, and starting out with a small amounts, adding “minimal” positions are still sizable when it comes to % thanks to that good ol’ small number magic.

Cheers,
MJ

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Hey WyTaay !

Welcome ! You’ll find both sides of the isle on this one. If your conviction is real strong in the future of a company, I’d go for it. Some here just won’t let any one company get above a certain percent of their portfolio … and that’s OK. I personally don’t subscribe to that method of “protection.” I have a couple of companies that can, have, and will fluctuate between 10% and 20% of my full portfolio. On a few occasions, I have, as you allude to, added to an “already full” position because the opportunity was just too compelling. I’m a VERY long term investor and these companies will rise and fall in percentage sometimes because of other companies actions (share price).

I go with what I like, “feels good”, and will let me sleep at night. That’s what I advise for you. Others will chime in differently and that’s OK.

Hope this helps,
Rich (haywool)

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MJ -
I’ll step in to answer as I believe one learns by teaching. I joined the board about 9 months ago and had similar questions about how you shift funds in a portfolio or add to the portfolio. Saul likes to cap the % of portfolio for one company at 20% no matter how good it is doing. This allows one to “sleep at night”. I think each person needs to find that level that allows a balance of risk of gain/loss and sanity to not have to watch over your portfolio every minute. I personally have a much higher risk threshold and will let that get much higher. I’ve read some on this board have over a 100 stocks which obviously is about 1% each. Saul has stated that he will shift funds from a stock that has not moved much into others have taken a large drop.
If you want to understand the companies you are invested in and stay up to date in events, having 10-15 stocks total is the reasonable limit. This would be about 7-10% each. By having a top 3 or 4 high conviction stocks (allowing them to go up to 20%) that allows your portfolio to have more movement (up and down) than if you maintain a level spread across the portfolio.
If you are continually adding to your portfolio you can add small “starter” positions in companies you need more time to investigate before you can get a full conviction or you can add to ones that you feel the market has punished without merit.
Investing really is personal in so many different elements like your timeframe of needing the funds (your age), your risk tolerance level, your goals for growth vs income or value… Welcome to the board.

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Welcome WyTaay - you will hopefully find this to be a very encouraging board for a rookie (as you define yourself). I believe that haywool has a great perspective here in saying that “averaging down” can be a good thing, but I would add a few disclaimers based on what I’ve observed over my career.

First, it is ABSOLUTELY VITAL that if you are going to buy more of a stock that is moving the wrong direction, you must be willing to revisit your original reason for the purchase and objectively decide if that reason is still valid. Don’t move the goalposts to justify a mistake - if you got something wrong or the story changes, move on and live to fight another day. Many very intelligent people dig themselves into an irreversible hole by being stubborn and unwilling to admit errors. My rule of thumb is that is a stock goes down more than 10%, I revisit my reasoning and play devil’s advocate to try and shoot new holes in the thought process. As an aside, I recommend doing this before buying a stock as well.

Second, in my opinion if you are going to double down on a stock and/or make it a very significant percentage (this is a relative term and means different things to different people, but generally any position that is over a few percent of the total would be considered large by most - then you MUST be willing to do a heck of a lot of work to make sure you know the story inside and out. Reading someone else’s thoughts isn’t good enough, because you are the one putting your own money at risk, and only you can decide if a stock is right for you. There are 2 reasons for needing to be very well informed before doubling down. 1 - by knowing the story intimately, you are less likely to ‘panic sell’ at the absolute worst time because you are scared. 2 - by knowing the story intimately, you can better identify when a selloff is unwarranted and react in a timely fashion.

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and it’s had a dip in price that makes you want to add some more, but it’s already a high allocation of your portfolio, whaddya do?

MJ:

Maybe that was a trick question? :slight_smile:

IMO, you would do well to study Saul’s rules and understand that they are guidelines that can produce more consistent returns over the years…but only if they are followed.

There have been a few studies over the years that argued that one of the reasons that 90% of investors cannot beat the index consistently is that they simply cannot “consistently” follow their rules. Even Saul probably veered from his own guidelines with the recent BOFI purchase.

I would argue that Saul’s greatest strength and perhaps his greatest asset as an investor is his ability to move on and not dwell on certain stocks…seen so many people keep hanging on their losers and follow their losing stocks down to pennies…refusing to bail as though it was their own child. So IMO…this may be his greatest strength as ab investor and one that would be best to emulate.

That said, I have my own rules that would veer from your question (and likely many others here) and that includes:

  1. NEVER average down…ever. If a stock is worth its salt, it will come back and regain its mojo and you can jump back on board at that time…but many times (one study suggested most times), a single disappointment is usually followed by more disappointments.

  2. Never buy a stock below its 200 day moving average…ever.

So in your hypothetical, I would not be buying your stock now regardless…but these are just my additional rules…doesn’t have to be yours.

Wish you well in the marathon of investing!

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bobloblaw,

(Dude! That is hard to type!)

There is one thing, by having a cap on size, and by being fully invested, you are by nature forced to take some profits from things that have gotten ahead of themselves, and you have to make a value judgement between, better and best, not in or out.

In other words, if you have something that is already overweight in your port, and you add to it, and it goes up, how much can it go up before you have a completely unbalanced port.

It appears to me from watching Saul, that there seems to be a point where you cannot dig out of a buy on the dip hole because if you are correct you will have to take profits before you are in the green on the trade.

It seems to be a better strategy to average up, not down.

Just me, but I have not put skin in the game yet, I am still watching.

Cheers
Qazulight

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Agree with Duma’s #1 rule about not averaging down

Not so sure about not buying below 200 week MA.
Because it is arbitrary (why not 199 or 201 day MA ?) and because most stocks above their 200 day MA were below it in the not too distant past.

However both of these do have the huge advantage of introducing some discipline in what is all too often an emotional choice ,reinforced by selectively ignoring all data that does not agree with you. An all -too- human trait.

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A big thanks to all who replied - all excellent points and I greatly appreciate the time you all took to read and respond to my post.

To clarify one bit on my O.P., a quote from Saul’s KB (Saul’s KB, Newly Revised, Part 2, ## What is my Buying Policy? http://discussion.fool.com/knowledgebase-newly-revised-part-2-32…)
, which I have read many times and continue to refer back to (bolding done by me)…

There are others who like to “average down,” which sounds good, but it often means buying an idea that isn’t working out (watering the weeds, making excuses for bad news). Oh, sure, if my original purchase was at $73, and a week later it’s at $71 because the market is down a little, I might add a little.

My question was an example of what is bolded above: a small market movement. Definitely not a case of averaging down.

Also a point I should make clearer. The position I opened was not very long ago. As in a couple of weeks.

Anyway, it was a good thing for me to get some thoughts out and to hear what others thought, and again, I really appreciate that.

For the record, I decided as I posted earlier to stay the course and not add any more - I guess you can say I answered my own question after taking the time to type out my post - but I thought it would be good just the same, for my own edification, to get some opinions on some of the thoughts I was having.

One last thing: this board and the people on it are awesome, and I really dig how much I feel I am learning by just reading your posts everyday. So thanks again for that.

Cheers,
MJ

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Hi Wy Taay, Sorry to be late responding, but am in a different time zone now so missed the discussion. You got a lot of very good advice. I could add one point to what I’ve already written in the Knowledge Base: It also depends on where you are in your life. If you are a young guy, and your total portfolio is small (in relation to what you can add each year), you can take a lot more chances and concentrate your portfolio more. If you are retired like me, with no new money coming in, you have to be more cautious. From your most recent post, you seem to have a good understanding and it sounds as if you are on your way to becoming a very good investor.
Best wishes,
Saul

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Question from a rookie investor: when you have a strong conviction in a current holding, one that you’ve even added to in the recent past, and it’s had a dip in price that makes you want to add some more, but it’s already a high allocation of your portfolio, whaddya do?

WyTaay,

Lots of great advice here already, but to give you a different perspective here is my philosophy:

I always look at my investments as if I were making my first purchase of shares in the company. I don’t care how many shares I do or do not own, I don’t care how big my position is, I don’t care if I am thinking of buying or selling or just reviewing the company. I always look at the company as if I am not yet invested.

I then evaluate if I would invest today or not, and how much I want to invest. Based on this, I increase or decrease the size of my position as necessary.

I go through this process any time I have new money to invest, any time there is major company-specific news, on any major stock price jump and in general a minimum of once a month for every stock.

I’ve found this completely eliminates doubt about when to add more money to an investment as well as answering the question of when to sell (e.g. “I wouldn’t buy as much as I currently have invested.” means I should consider selling some shares). Over time, my knowledge for each company I am invested in increases so each subsequent decision hopefully increases in quality.

I have so far found this philosophy to be very good both at finding attractive prices for buying and for determining how much of my portfolio I am willing to allocate to a single company. The only drawback is that it does require quite a bit of work to keep up with all my investments in this way (17 at current count and I may reduce that to 15 in the near future).

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Hi othalan, I like your method. It’s quite an interesting way to go about it.
Saul

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WyTaay,

I agree with may of Othalan’s points. I have been lurking on this message board for about 6 months reading all I can and trying to catch up on many old posts (so much to be learned).

As for averaging down, if we believe Mr. Market has conniption fits at times for no reason (heck, look at the Market so far in 2016) and Rising/Lowering tides Lift/Sink all ships, then we just need to figure out if our reasoning behind our first purchase was sound and is still plausible.

If after a “Fresh” analysis of the business, the story is still in tact, it is just better value and buying more is the way to go.

Look at SWKS, SKX, INFN and many other stocks mentioned on this board. Did they all go up since Saul purchased them? (Just using Saul as an example).

If I liked SWKS at $80, SKX at $30, INFN @ 16, LGIH @ $28, and all the stories still seem to be intact for the next 2+ years, why would I not purchase a little more SWKS @ $65, SKX @ $26, INFN @ $15, and LGIH @ $26? It makes no sense not too.

Great Day,
Pmoncho

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Averaging down can be good or bad. If you average down to try to mitigate losses, that’s bad. If you average down to take advantage of a fire sale of a wonderful company, that’s good. It’s your motivation that makes the difference.

Too often only one side of these issues is presented as if the other could not possibly exist.

Context, context, context!

Denny Schlesinger

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<i<If after a “Fresh” analysis of the business, the story is still in tact, it is just better value and buying more is the way to go.

I agree, Poncho, the question is, is the rational intact. If so, you can buy more. If something happened to change the story, you need to re-evaluate before buying more.

Saul

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Averaging down can be good or bad. If you average down to try to mitigate losses, that’s bad. If you average down to take advantage of a fire sale of a wonderful company, that’s good.

I agree with Denny, too.
Saul

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Or this could happen …

one economist, James Dale Davidson, believes that cheap oil is the least of our problems.

“It’s not cheap oil that should frighten you,” Davidson warns, “There are three other key economic indicators everyone is ignoring. And they are screaming SELL. They don’t imply that a 50% stock market collapse is looming, it’s already at our doorstep.”

{taken from The Sovereign Investor}

Personally, I don’t put much stock (pun intended) in scare tactics such as this. Could happen … maybe. Will happen … dunno.

Rich (haywool)