| | | There are some important nuances in what you say that need to be expanded on.
#1 Yes, sitting on a profitable position is how you will make the most money. But no, for the vast majority of things you should cut your losses quickly. There is a method to the madness of this contradiction which is not easy to explain. I've read Jesse Livermore's book multiple times and I recommend the annotated version to everyone (BTW, it has a preface by Pau Tudor Jones who is arguably the modern day Jesse). Two quotes from that book have always stuck with me: (A) When man buys something and it shows a loss, he should understand that he was wrong, at least at moment, and he should right himself. (B) He said that it was not his trading that made him rich but his sitting.
This contradiction is most easily resolved by saying that will average up and hold on to a position so long as it is making money. This what I do about 90% of the times.
#2 Commodities (and commodity producer stocks) are different beasts than stocks. This is a rare category where *sometimes* it makes sense to average down a.k.a fight the tape. I explicitly cited asset valuation as the main (only?) reason to sometimes justify fighting the tape. But fighting the tape with CHPT or even INTC would not have been worth it.
How does this go? But strong producers near the bottom of the cycle. For example, I am on public record on SI that I fought the tape and aggressively bought oil producers (leveraged oil stocks) during July and August of 2020. Many people thought that I was nuts. Firstly covid meant lockdown and few people needing gasoline. Secondly EVs were projected to come out swinging and killing what remained of ICE cars.
But I knew that a vaccine would be found and that oil was not going to go obsolete anytime soon. So loaded up all that I could. Then in a matter of 4 months I made 7x gains on very large position. And I am by no means an oil trader or know zip about energy industry. I was just willing to wait while accumulating undervalued assets.
HOWEVER, this logic does not apply non-asset/non-value plays and it usually doesn't apply to single stocks. It works well for sectors.
For example, you may have heard me recommend uranium before it took off and more recently recommend palladium and platinum stocks. I really didn't do much more than to note that the metal was trading near its cost of production and therefore any uptick would have leveraged impact on the stock of the producers.
Have a look at the chart of PLG or SBSW and you will see.
So yes, what you said is true. But it is true for a rare and specific case. If you find a valuable asset on the way down and get on board within 20% of the bottom, you can/should average down and wait for the cycle to turn. But even then it is best to not catch a falling knife and add only on the bumps up.
I would not average down with the average stock. |
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