To be wrong is OK, but to persist in
being wrong again and again by averaging down repeatedly doesn't sit well.
Averaging down can be both wonderful and deadly. I found a simple rule that helps me, at least, deal with this (or at least give me confidence that I think I know how to deal with this ;)). I have the utmost confidence in Deswell still, by the way.
First I had to decide that I wasn't going to average down more than once in any stock. And once I decided that, I decided that if I were to average down, it would have to make a significant difference in my basis, enough to offset the increased risk signalled by being wrong once. And a 20% drop doesn't do it - my cost basis is still 90% of original. I've decided on a 33% rule - a stock I have the utmost confidence in must fall at least 33% before I will even consider it again. And if I can I'll try to hold off for a 50% drop.
A corollary to this is that I won't buy a stock again at the same price or at a higher price unless significantly material new information is discovered by me.
These rules have caused by default, but also by design, the number of stocks in my portfolio to grow and grow.
The days of saying, "wow, this is cheap" "wow,it's still cheap" "wow, it's even cheaper" "wow, now it is really cheap" and buying at each of those "decision" points (and thereby concentrating my portfolio by default), are behind me.
Mike |
