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Wednesday, 27 June 2012

Average up or down?

I have an ex-colleague who is now the tai-tai of one of the big luxury watch retailers in Orchard Road.

While entertaining overseas clients, she may bring them to one of our casinos.
She never loses money there. OMG! How?

Her system is simple.

She will place a $100 bet on the roulette table on either black or red. If she wins, she got back her $100 entry fee. End of story.

If she loses, she will increase her bet to $200 on the same colour.

Lose again she increase the bet to $300 and so on.

So far, she always got back her $100 entry fee. Of course there was this one time she got a scary 12 rounds of reds against her…

I’ve written a tongue-in-cheek post on this topic of whip cream or leather whip.

But that’s for the “Mind” part.

Today I will be exploring the “Money Management” and “Method” parts (at least I’ll try). 


Money Management

To recover from a 20% loss (paper or realised it’s the same) we need to either hope our existing position goes up by  25%, or sell this loser and switch to a winner that gives us a 25% return.

To recover from a 50% loss we need a 2 bagger.

To recover from a 90% we need a 10 bagger.

Mind you, it’s just to break-even – there’s no profit to speak of yet! 


Method

How many 10 baggers or 2 baggers have you got in your track record?

And please don’t tell me you never got any 25% realised winners before! (If you don’t, you may want to review whether DIY suits you at all. Outsourcing?)

Here it’s not what you intend or hope to do or accomplish using what not techniques or strategies. It’s what you have achieved. Period. 


Average down

Looking around me and at my own speculation journey, I found to do average down successfully, you need the below ingredients.

  1. Lots of new money coming in
Like my tai-tai example, if you have lots of new money coming into your investible funds every year.

You invest $10,000 into a stock from crashes from $1.00 to $0.10.

You average down another $10,000 at $0.10 and you just need the stock to “double” at $0.20 and you will make a small profit from your $20,000 bet.


  1. Good at picking multi-baggers
The above example is about the futility of making plans based on “what-if” scenarios. Mathematically it looks simple and plausible.

But again, look at your track record. It matters more than comparing others’ track records – be it from gurus or your peers. 

If you’ve never got a 2 bagger, what makes you think by putting extra $10,000 on a dead stock will make it miraculously double to $0.20? 

And if you have no new money to invest, you’ll need a 10 bagger just to break-even!

People celebrate when they’ve got a 10 bagger - $10,000 becomes $100,000!

We? $10,000 becomes $1,000 and then back to $10,000. How many years did it take for this wonderful recovery to happen?

We wouldn’t want to tell anyone since anyone who placed the same $10,000 in a savings bank would have beaten us. Shhh….


  1. Luck is on your side (Or you really are smarter than the market!)
I got my answer to whether to average up or down with my Greek tragedy holding in Jurong Technologies.

I could have cut at 20% loss. Huh! I could have cut at 50% loss. Humph! I could have cut at 90% loss. Hahaaaaa!

Noooo… I so very the stubborn and “smart”! Then it got to a big zero when it bankrupted and got delisted from SGX.

That’s a very expensive lesson on buy and hope!

Well, the silver lining is that I did not average down. Phew!

You do the math. Imagine you start averaging down at minus 20%; minus 50%; minus 90%?

Even if you can print money like Bernanke, worthless is still worthless.



Average up

Eh… I think you can fill in the blanks here with your own reflections using examples from your own track record.


Keep losses small

Those that did not have a long enough track record don’t worry. In time, you will understand why Warren Buffet says don’t lose money. And why not having a down year works wonder with compounded returns for Peter Lynch.

Traders learnt very quickly you can’t play when you have no chips.

Investors may take longer as we can hide under the “it’s for the long term denial”…

It does not matter what you call yourself – value, growth, dividend, long term, etc. It’s our track record that determines whether we are successful or poor investor.

How to minimise losses? It’s the Mind part of the equation. There are lots of system tools and hedging techniques. But if the Mind refuses to act, it’s all very academic.

46 comments:

  1. Average up or down, these are strategy that only serve to make money or make back the money that were lost.

    traders have this mentality only want to win. it in itself is not wrong but how about strategy that will limit your losses?

    they are more important than strategy that only serve to win.

    ReplyDelete
    Replies
    1. oh you did mention limit losses. its not a minds equation. its a strategy that you must carry out every single time. that does not necessary applicable to winning strategy.

      Delete
    2. what i mean is if you miss a winning strategy, you can knock your head as many times as you like. but if you miss a "limit losses" strategy, you can kiss your account goodbye.

      Delete
    3. as i'm writing this, knn, i had been cutting losses left right and centre. chasing (long position) market every where.

      you never know the market will still going up day after day. this is not the time to think of winning strategy.

      Delete
    4. Stay very alert and stay safe.

      Market very erratic and volatile recently.

      Not my kind market. Lucky I closed my June simsci shorts at 321.8 on Monday night for a tiny profit.

      I prefer month of May's one way street. That's a lot simpler and calmer for a slow swing trader like me.

      Delete
  2. Coconut,

    It's a Mind thing using the 3M analogy from Alexander Elder.

    "Investors" who average down tend not to see paper losses as losses.

    I am just trying to show that even after all the huff and puff, so what even if we get a 2 bagger or 10 bagger if its just to break-even?

    It's easier to cut-loss at 10 or 20% loss and live to fight another day. When we finally get a 2 bagger, it's real money in the bank! Not for break-even... We don't play not to lose.

    Successful traders learned this maxim very early in their journey or else they would no longer be trading.

    Investors, unless they are lucky to experience my Jurong Tech early in their journey, may keep holding and hoping. As if chanting "in the long run equities return 8%" would help.

    ReplyDelete
    Replies
    1. Hi SMOL,
      Pyramid 12345 or 54321 is still a pyramid. The only difference is pyramid up is safer but to me harder to do. All investment manuals discourage pyramid down but encourage pyramid up. The reason is quite obvious. For me i have yet to try to pyramid up because psychology it is very difficult. It looks like you are paying for something which getting more and more expensive. Nevertheless, we must be quite sure of the stock that will still be around for a long time before we pyramid down or up.

      Delete
    2. Temperament,

      So you prefer the leather-whip! Naughty!

      Psychologically, I prefer the market to reward my buys with a immediate small margin of safety. It's like a pat on the head.

      The average down is perfectly OK if we have strong conviction as a contrarian. Each time we buy market says wrong and gives us a slap but we persist we are right!

      Delete
  3. Average down? One needs license to do that.

    License?

    After successfully completed one full market cycle of Bull-Bear-Bull or Bear-Bull-Bear, one will have license.

    ReplyDelete
    Replies
    1. Ya lor!

      No one told me about the license and I've to pay $40,000 for that stupid Jurong Tech license.

      I now got license to "average down". But that's called scaling in. Better don't confuse others..

      You are right. How to discuss sex with virgins?

      Delete
    2. More like paying for COE. LOL!

      Delete
  4. haha Temperament, again i'm on your side.

    this topic which is great, is going to go on forever. i made my biggest profit using both average down as well as up (combination). both works but both have pro and con.

    Temperament is absolutely right, if you are a average down guy, learn to average up, if you are a average up guy, learn to average down, although i think the later will be more difficult.

    if you are neither one of those, visit the casino will be more entertaining.

    ReplyDelete
    Replies
    1. smol, i thought 3M is a company? who is Alexander Elder? i heard of him but never read his book.

      traders with your kind of mentality will always fighting with the market, winning is every thing. until you know successful traders are actually dancing rather than fighting with the market.

      Delete
    2. LOL!

      Diversity of views make the discussion more stimulating mah!

      Perhaps the question is not average up or down; but how to minimise losses. Ai yeah, eggs on my face again.

      In the money, we are "eagle-bear".

      Out of money, we are "dog-bear".


      Just saw in unofficial Jim Rogers' link below:

      "The trick to investing is not to lose money. The losses ruin your compounding rate and compounding is the magic of investing."

      Delete
    3. did Jim Rogers say that? how not to lose money in trading and investing???!!!

      if your investment up 100% then down 50%, does this 50% draw down constitute a lost?

      as a trader, yes. as an investor may be not! so please don't just listen to what others say.

      haha wake up already?

      Delete
    4. Coconut,

      OK, I got the hint. I am forgetting Alexander now...

      I don't fight the market; I try to surf with the market (hence average up mah). I go where the wave takes me.

      Problem is sometimes wave too big plus I "gay-kiang" try to ride it... Blue-black like no body business! Lost my swimming trunk some more!

      Must stick with my less volatile intermediate waves.

      Delete
    5. "if your investment up 100% then down 50%, does this 50% draw down constitute a lost?"

      Ha ha!

      I better to listen to you on this one!

      What trader what investor? You try to smoke me with your "no screws" logic!

      I rather take a 10% loss when market turns against me after my double. Then I am still 80% up for the year.

      Go for holiday to Bali or Phuket. I relax in the sun while those who can't take a loss try again to regain the 100% paper profits that slipped through their hands.

      Delete
    6. haha, please don't listen to me but now listen, trading (mentality) and investing is absolutely not competable. don't get them mix up or you will lose your pants.

      a lot of good traders lost money when they invest, and even more people lost money thinking they are investing but what they do is trading!

      i'm a trader mentality, my recent investment (sintel etc) only lasted er 3 months haha knn.

      Delete
    7. ofcos i had an excuses,

      "look here investor (mentality), now i will start to actively trading again, so please move aside and don't come back til i call you again".

      so there goes all my investment haha.

      Delete
    8. Ha! Ha!
      i know what you mean. i think i am more an investor than trader. i lost quite a lot of money whenever i KK try to be a trader. Then i got mixed up half way not sure whether i am a trader or investor.
      i attended a short trader course and the instructor kept on emphasizing for trader they should boh chap anything but looking at all the charts available waiting for opportunity to B/S, basing on the interpretation of technical analysis of the charts only. He said when the news was in the market, you were surely too late to act as a retail investor. i agree there is some logic in what he has said. So it is very difficult to be good in both. If you are good in either one, you already laughing all the way to the bank----Ha! Ha!........to the bank! No complaint!

      Delete
  5. "Problem is sometimes wave too big plus I "gay-kiang" try to ride it... Blue-black like no body business! Lost my swimming trunk some more!"

    nobody knows that wave you are riding is too big! so don't blame yourself.

    that is why one good strategy will not work all the time. but still you have to ride it (cos you don't know). this is the time you must, i say must learn to control your losses and emotion.

    this is something a trader cannot avoid and should not avoid but to face it, i say must again. and again don't blame yourself for the losses but see if you did a good job of minimising your lost.

    ReplyDelete
  6. Coconut,

    Very sorry.

    I meant: "I better NOT listen to you on this one!"

    Die. My mind says poke him; but the hand override by showing too much respect.

    Better wash out your poison!

    OK, I try poking again.

    Singtel? Of all stocks you choose this? It's boring and hardly move one lah!

    I think commodity cyclicals like Olam, Noble, and Wilmar would be a less traumatic transition for you.

    More action packed for a trader ;)

    Although I won't call it "investing". LOL!

    ReplyDelete
    Replies
    1. Jokes aside, I always enjoy our discussions Coconut.

      I like your say what you feel kind of comments.

      No inhibitions, no mental processing (is this a compliment?), no camouflage, no holds-barred!

      Delete
    2. haha guess what i'm long with. ya singtel, what a waste of time.

      yes, commodity counters are good play but one has to be very fast and decisive.

      i'm long commodities and short properties, ohch!

      Delete
    3. i guess the way that i talk is the same way i trade. you can't really think too much, just do (say) it, no time to lose.

      blogging also resemble (hows my english? no dictionary ok) trading with lots of fun and sometime frastrated, need to poke people once in a while.

      Delete
    4. i remember the first time i blog, i would write and say to my daugther, come come and correct my spelling and grammer. you know, its a big thing for me. i need to present myself properly like going to a wedding dinner haha, very nice and polite language.

      then one day not long after i blog, i saw a fellow traders jmot's blog title "money management" in a casino!!

      knn, i flare and wrote comment straight into his face haha. it wasn't polite. luckily he took it with great spot. from then on, all hell got lose.

      Delete
    5. haha, mine can hardly compare with others, an example in respond to yahoo post - "City Harvest Church Member writes to MCYS Minister; demands for apology from Commissioner of Charities"...

      quote

      "All these pigs will be skin in HELL........
      Thou shalt be punished in HELL FIRE forever.........
      Thou deserved HELL............
      Puiiiiii................."

      unquote

      Delete
    6. Are we writing for English test or exam?

      Or making a living as English tutor?

      Who care!

      Delete
    7. If later we discover the mistakes are too glaring. Just edit lor! Got issue meh?

      LOL!

      Delete
    8. ya, should have known better. but i was mainly writing at one chartist blog name something "barrow" something (forgotten his name), need to present "professionally". he used to appear on CNBC you know haha.

      now, everything goes!

      Delete
    9. by the way, he also "kanna" left and right from me believe me or not but in friendly manner.

      Delete
    10. To speaking what's on our minds!

      It's better to ask for forgiveness than ask for permission.

      Delete
  7. "forgive me for saying this, you are really, i mean really stupid"

    sounds ok?

    ReplyDelete
    Replies
    1. i had been accuse of being no manners, even rude ever seen i start talking.

      Delete
    2. Coconut,

      I like you just the way you are!

      I've told you before when I first saw you at Fat's blog, I remember getting pissed off with you. Hogging the whole comments page, talking to yourself and all...

      That's because I didn't know you then. At that time, I find you more than rude, you were obnoxious!

      However, when I discovered you are dyslexic, have a dash of autism, I suddenly see you in a totally different light.

      Now I just picture you as someone who was dropped when you were a baby, hence no screws in your head, and all is good :)

      At our age, I am sure we have met people who impressed the pants off us during first impression; only to be let down later when they took off their wonder bra... Eh? What talking me? (Oh! Just a metaphor!)

      LOL!

      Delete
    3. seriously, i don't even know people are piss or angry until i see their reaction. i just say as it is, thats the big problem with me with my whole life.

      when you reply to me, i must reply back, don't know why? i feel very bad if i don't. thats another problem haha.

      so to prevent all these problems and chaos, i stop talking when face to face, i don't really talk at all and i don't like to talk at all, believe me or not.

      ya, really appreciate fat, jmot and yourself being so patient with me.

      Delete
    4. fat's gone, jmot's gone, your are one that is left holding the bag haha.

      if you are gone (i mean stop blogging). i will be gone too.

      Delete
    5. Hi coconout,
      i believe God makes everyone for His own purpose but not for you or for me, or for anyone. And don't forget the World can progress because there are "funny people thinking funny things". i always find you "funny"
      Cheers! & Shalom!

      Delete
    6. i began to get nervous, this is the 40th post already. someone might be getting piss. this one going to be the last.

      temperament thanks, i do have autism.

      Delete
  8. I should be so lucky to have 3 qian-bei here to make me feel young.

    I am the "flower monk". There's a "fisherman", a "man of the cross", and eh... "talking coconut"? LOL!

    We need one more "lao-wan-tong" hero. Then we are complete like in the "Condor Heroes". A hero for each point of the compass and the centre.

    Since I am the monk, I take the south :)

    ReplyDelete
    Replies
    1. actually i myself find it so facinating that a man without words, thats what they usually call me, can't stop writing or expressing myself on the web, given a chance ofcos.

      i had been "kick out" of other site, 4 or 5 times already. so like smol usually do, test out the water before i jump in.

      er condor, i think i take the "lao-wan-tong", he trade, i mean fight with both left and right hand, just like i do spread trading.

      Delete
    2. ok, back to serious business, the market is getting boil! i will take out my shorts and hold the longs for the weekend.

      i know its dangerous but i don't want to be in the red for the month of june, done.

      Delete
    3. Ya hor! You do spread trading - left hand fighting with right hand!

      OK, you get to be lao-wan-tong!

      I think Dong Xie and Xi Du will be harder to lelong out...

      Hmm... Maybe "man of the cross" should be the southern monk instead?

      I take Xi Du since I like to write satires and poke at others. Wee bit; wee bit. Or should it be gu gua; gu gua?

      LOL!

      Hello! I am out of the market. You better watch the market if you have positions on!

      I going out soon. Don't play with you liao!

      Delete
  9. My friend once use the double down method in NZ casino.
    13 rolls of the opposite before he run out of chips.

    Dangerous game to play.

    ReplyDelete
    Replies
    1. Exactly Cory!

      The odds between red and black remains 50/50 - no matter how many times a colour comes up consecutively.

      I used this example to show that those who average down also exhibit the same irrational thinking - "The stock has come down so much surely it can't go lower?"

      I was that silly fool :)

      Delete

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