“You’re nuts to Average Down”
By Paul Price
Averaging down on your holdings means buying more of a stock that has already declined in price since you selected it to go up. A quick search of internet investment advice turns up dozens of stories with headlines like these…
Conventional wisdom says that the very fact that a stock went down means your investment theory must have been wrong. How silly is that idea? For me, if I liked it at $40 I’m going to love it at $30 unless something changed radically, and permanently, for the worse. Still, I put my idea to an impartial screen to see if I was simply deluding myself.
I went back and checked the 2012 highs and subsequent 2012 lows for all thirty Dow Jones Industrial stocks. Then I noted what they’ve done since hitting those lows (through Mar. 15, 2013).
There were some obvious takeaways once my chart was completed.
During the year, 100% of the DJIA companies traded below their annual peaks. The intra-year declines ranged from as little as 5.8% (JNJ) to as great as 62.2% (HPQ). 30 out of 30 closed last week above their 2012 nadirs.
The biggest recovery came in last year’s biggest dog. Other large percentage rebounds occurred in lower quality BAC, old-tech companies (CSCO & IBM) and the controversial bank JPM. While those stocks were ‘falling knives,’ the old adages about never averaging down were certainly quoted numerous times. Adhering to that advice was a hedge against prosperity.
The DJ Industrials are all substantial companies even if a few are not what they used to be. None of them were likely to disappear anytime soon. The best opportunities for making good money came in buying the shares that had gone down the most. Many of the more conservative stocks didn’t fall as hard, nor did they rebound as well as the worst-thought-of names.
No matter which Dow stocks you picked when they were down-and-out, you’d be sitting on paper gains right now. Zero percent of the ‘avoid at all cost’ stocks are lower now than they were at their 2012 bottoms.
Ignoring the doom and gloom crowd, and buying what was cheap, worked much better than sticking with currently popular names.
The next time you hear someone telling people to avoid averaging down refer them back to this article. Facts trump platitudes every time.
