Ron, I emphatically agree with your suggestion to phase into busted stocks. In the long run, busted stocks eventually come back, but they can go much lower than anyone ever dreamed possible. BBY has a very small float, only about 32M shares, and this contributes to it's volatility. This can work to your advantage when it gets rolling the other direction because there's not a lot of stock at the bid or ask and relatively small trades move the price.
You recommended the following phase in approach:
Buy stop - 500 - 16.75
Buy stop - 1000 -17.75
Buy - 500 - 14
Buy - 500 - 12.5
Buy - 1000 - 10.5
Let's assume that the price keeps declining and doesn't hit your buy stops. I'm not speculating that this will happen, only analyzing what your position would be under the worst case circumstances.
First, you would buy 500 shares at 14 for a total investment of $7,000. Next your limit at 12 1/2 would get hit so you would own 1,000 shares at an average cost of 13 1/4. Total investment up to that point would be $13,250 and you would have a paper loss of 3/4 per share, or $750 (5.6%), not too bad.
Finally your limit gets filled at 10 1/2 and you own 2,000 shares at an average cost of 11 7/8. Total investment is $23,750 and your paper loss would be 1 3/8 per share ($2,750 or 11.6%). That's not too bad of a position for a stock that declined from 14 to 10.5 (25% decline).
So I agree that your strategy is a sound one. Just curious, what would you do if the stock got to 10 1/2. Would you place a sell stop below the market, or keep averaging down. Also, if you get filled on the buy stop at 16 3/4 first, would you continue with your strategy of averaging down if the limit orders are hit?
Thanks,
Dan
PS: While on the subject of busted stocks and to demonstrate why it is important to phase into these situations, I bought INTV back in 1993 at 12 1/8 after it had fallen from 23. The stock kept on going and eventually hit 5 3/4 (for no reason, mind you. no news or anything negative from the company). I bought three times as much stock at 6 1/2 than I did at 12. The stock eventually began rallying and I sold it all at 20 3/4 about 6 months later (only because some covered calls got exercised) for a very nice profit. The stock continued higher and eventually got to 32. That's why I say busted stocks can go much lower than you ever dreamed possible. I'm not saying that this will happen to BBY, but then again nobody knows for sure what the future brings. The market is a very wierd place, as you know, and strange things can and do happen. The best defense is to plan ahead what you will do if the price moves against you and you demonstrated this with your very sound suggestion. |
