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Technology Stocks : Stock Swap
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To: Alastair McIntosh who wrote (443)2/22/1997 12:59:00 PM
From: Natty   of 17305
 
I concur with your position on averaging down, especially in the context
of short-term trading. What I find surprising is the number of people
I know who do this as an almost automatic reaction to a dip in a stock
[especially in a fairly recent acquisition].

I rarely average down, especially with the 'small and volatile', for
the very reasons given in your example...it (usually) ends up costing
more [maybe this is just my affinity for options trading talking].

This is not to say that there are no merits to averaging down, it is
just a matter of using the appropriate strategy for the situation. If your
purpose for acquiring a stock is short-term (momentum) trading, then
I have always found exit and re-entry preferable to averaging down.
However, if your investment is based on value and fundamentals and
you have take a long-term growth outlook [ie buy & hold], then
averaging down makes more sense -- but only if your plan consisted of
increasing your position.

Averaging down would also be applicable if your goal was to maximise
your position -- such as a precursor to a takeover (whether you are
launching or just along for the ride).

Of course, these two examples by no means constitute an exhaustive list
of when to average down. The most important point ot note [both in
my rambling and Alastair's more elegant presentation] is that you
must have a plan (strategy) when you invest, and that you must be
disciplined enough to stay with your plan.
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