Thursday, 11 September 2014
Average Down versus Scaling In versus Dollar Cost Averaging
Nothing draws in new batches of cannon fodder like the bull market of 2013 - be it STI or S&P.
I think its good to revisit this never ending average down topic once again.
Experienced investors and traders (lived through 1 bull/bear cycle) you can move along now. Nothing to see for you. You won't be where you are today without a well established opinion. Don't change a winning formula. Wink.
For newbies curious to hear the arguments from "lao qian beis" - Average down or up?
Read the crazy comments
And for those above 21 and don't mind a more RA content - Whip-cream or leather whip?
Note: I never say listen to others; I merely said hear their arguments.
Once you have finished a complete bull/bear cycle, you would have your own answer. Nothing illuminates more than your own track record.
Homework: Can you tell the difference between Average down, Scaling in, and Dollar Cost Averaging?
Are they the same?
Or are they miles apart in differences?
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Newbie investor cum blogger from Invest Openly kindly submit your homework here. LOL!
ReplyDeleteCW,
DeleteI am very amused that not more people challenged you on your recent post:
http://createwealth8888.blogspot.sg/2014/09/why-do-we-lose-money-in-investing.html
Maybe your readers are too respectful of you ;)
How come no one challenged on your plan:
If STI is 2500 - you buy X%
2000 - you buy Y%
1500 - you buy Z%
Is this not average down? But why then you say DON'T average down?
Shh...
LOL!
Think to conduct $5 per pax class at CC on "Know the Difference and don't get yourself killed by Average Down till no return".
DeleteBYOW
Bring your own water as nothing is provided.
LOL!
Share you a true story.
DeleteOne day, I was fishing at Batam Kelong. One young man SMSed me : "Uncle, I am down on CMA with more than 60% of my capital. How?"
Panic SMS for advice. What is your answer?
A) Average Down
B) Scaling-In
C) Dollar Cost Averaging
CW,
DeleteHmm. Maybe I can share at the CCs "How to blog for hobby"?
I guarantee can't make enough to quit day job one. If can, I will refund the whole course fee?
How's that for conviction?
LOL!
CW8888 : I assume that's me?! lol Looks like more homework to be done... ;-)
DeleteSMOL : In your last comment, since you mentioned "how to blog for hobby", so the participants would not expect making any money, if yes (they did make money), that would be a bonus. So, no worry about refund policy ;-)
Richard,
DeleteI've no idea why CW mentioned you specifically... Perhaps it's a man love kind of thing ;)
Ah! I did not say cannot make money from blogging for hobby; I only said cannot make ENOUGH to quit day job.
I knew I should have studied harder! Then I can take up law... Heard you don't need math to get into the law faculty?
Imagine getting paid for being argumentative!
LOL!
It seems the young man is trading. So.....
ReplyDeletetemperament,
DeleteThat young man has just reached his capitulation point - that's what happens when you don't trust your own convictions anymore (why he bought CMA in the first place); and stop believing the little lies he's been telling himself (CMA is oversold and will bounce back soon) ...
I dunno the difference between all these.
ReplyDeleteIf I'm trading => 见好就收。
If I'm investing => just put there first.
These days i seldom double dip.
pf,
DeleteWhat you have described is when you are ahead.
The question is what do we do when the trade or investment has gone against us?
Hi SMOL,
DeleteI am still quite a noob in the market (haven't been through a big bear) but I shall take a stab at this.
If the whole market goes down, it's easier to average down, especially when one maintains a sizable cash hoard (>20% of portfolio). So what if everything goes down again? Just wait. In the scenario that everything becomes zero, cash is probably worth nothing in this world too. =)
It's more difficult if it's just that one stock in your portfolio. If it drops by 20% or more and I got conviction in that company, I could initiate one round of averaging down.
But if it drops further, that's it. I have to protect against potential incompetence in my judgement. One can never be always right. =)
To make this method safer, make sure a position is never more than 10-20% (or whatever proportion one is comfortable with) of the portfolio?
15 HWW,
DeleteThat's what I like about you!
Try asking a question in a workshop or class in Singapore... Most Singaporeans just clam up. And will only hazard an answer if they think they know the answer very well.
Most of us value too much "face" over the joy of "throwing brick to attract jade".
I won't spoil the fun for you. You'll find out for certain when you have gone through a bear market yourself ;)
But I will say you are moving in the right direction by incorporating "OTHER" Risk Management techniques as complement.
If we use average down, scaling-in, or dollar-cost-average in their naked forms, that's an ALL-IN action!
And just like poker, if we are right (or lucky), we win a lot. But if we were wrong... Now is this action gambling or investing/trading?
For traders not so bad since most people equate trading with "gambling"; but if you call yourself an "investor"... Ouch!
LOL!
Yup...i used to avg down. But that's just losing more. So, don't buy anymore.
ReplyDeletepf,
DeleteAh! Got it!
For traders, there is Paul Tudor Jones' - Losers average losers.
For investors, there is Warren Buffet's - Don't lose money.
Hi SMOL,
ReplyDeleteI tried all methods. First I average down a S-chip , longcheer, until I flipped, then cut loss, losing a lot of my capital. Not much to cheer over that.
Second, I average down HSBC at the height of the gfc when banks are battered down. That went very well.
Third, some of the stocks I didn't do anything. Just too stunned to do anything. So I watched the bear come and go, the bull come and go before I released what had happened.
Lastly, though this is not averaging down, I wanted to buy in blue chips but I realised I don't have a war chest.
So I went from committing a mistake (average down low quality stocks), to averaging down higher quality stocks (hsbc) and doing nothing, to wanting to buy good quality stocks at cheap price but realising I don't have the funds. I went from dying to surviving, in a nutshell.
Hopefully I will be ready to not only survive the next bear, but to thrive on it ;) that's the next step.
LP.
DeleteI like how you summarised it in your nutshell- from dying to surviving!
If we "die" - bankrupt our account or damaged psychologically from our losses - then there's no comeback to speak of.
We will tell our children to study hard and work hard. Stay away from the "dangerous" markets...
Nothing illuminates more than our own track record!
You are fortunate that you have tried all methods ;)
Imagine if you tried the second method only.... That may set you up for greater damage when your account size is much bigger down the road...
You know personally the difference between averaging down in panic/get even and scaling-in :)
After all the readings of how to manage your investment funds in the stock market all these years, i have not come across a financial author who approves or teaches how to Pyramid down.
ReplyDeleteThe most they tell you to be very, very careful if you want to do it. And maybe do it one or the most two times for one stock. All teach about how to Pyramid up. And the reasons why it so much better than Pyramid down. Actually i can't argue or fault the logic of pyramid up. Yet @#$%&, i still have not tried it. Maybe i am an Old Dog who can't learn new trick?
Sad!
So New Dogs are advised to adopt the better strategy of Pyramid Up if you can. To unlearn what you have learned is so much more difficult and painful to learn it right the first time.
My 2 cents!
Actually in trading, investing or anything in life, you usually want to bet on the "winning side" not the "losing side"
ReplyDeletetemperament,
DeleteMy cheerleading role here is not to tell others what to do; but encourage others to embark on their own journey of self-discovery.
The danger of the internet is that sometimes people may unintentionally say things that may "mislead" newbies.
For eg, imagine had LP only cited his HSBC experience and left out his other experiences...
I am very wary of blanket statements like - I averaged down and made a 2 bagger subsequently.
That may be true.
We the reader must verify and seek the context and perspective of that statement.
1) He could have left out the other positions that gone to zero via averaging down. You never ask; he never say.
2) He could be buying-the-dip in a higher high and higher low market like from 2012 to present. Try repeating this from 2007 to 2008!?
3) He could be engaging in scaling-in but he calls it averaging down. Same same but different!
4) He is averaging down on a final position that is max not more than 5% of his portfolio. And what happens when a newbie does it and the position after averaging down is more than 30% of his portfolio? Who is more likely to capitulate and send urgent SMS to mentors? (Special shout-out to 15 HWW and CW for this point)
5) And so on....
Hi SMOL,
ReplyDeleteSometime I wonder if the person who boast about average down and get a 2 bagger is also blissfully ignorant of the risks??
Otherwise quite evil right?
I believed in diversification in stock and cash. No counter more than 10% for my eventual portfolio.
But then, I have this dilema, when market go into a free fall, which one you average down? or accumulate?
Do you have a core counter?
What are the criteria for accumulating on one and forgetting about another? Is magnitude of fall the only consideration?
Sell when business fundamental turn bad? When market go into a free fall, almost all business fundamental turn bad, so one should really be worried if the basis of your buy is majority quantitative, based on numbers. Because the numbers will look more horrible than you expect.
OK, my shameless 2 cents, see you praise people, I also want.. Praise me too?? ;p
sillyinvestor,
DeleteThat's very good questions you've asked! You have gone Socrates on me?
(Next time cannot ha! No fishing for compliments! We are not in kindergarten. Be cool.)
1) You have to ask yourself what's your understanding of SELL when the reasons you bought are no longer VALID.
We hate to be "wrong" right?
2) If you knew the numbers will be ugly - be it market or company specific reasons - using zero-based decision making, will you still buy if you "pretend" you didn't own the stock in the first place?
The astute oat meal guy once said: "I'll buy at a price I wouldn't sell; and I sell at a price I wouldn't buy."
Now that's something to ponder over!
3) By asking what criteria do you accumulate on one counter and forgetting about another, you have revealed you have sentiments too ;)
You are not purely about cold hard numbers and being logical... You have emotions ;)
We all have our precious one... My precious....
sillyinvestor,
DeleteAnd no, I don't think the person who said I averaged down and made a 2 bagger is evil. You too drama!
It's just EGO.
We do that unconsciously all the time:
You know where I stayed in Paris? That 6 star hotel was great!
Look at the $50,000 watch I just bought... Got 5 match-sticks one!
My ah boy got all As in his O' levels you know?
I good or what? My XIRR is XX% this year! What's yours?
LOL!
P.S. Come to think of it, I am wrong, We all are still in kindergarten!
SMOL,
ReplyDeleteI know of a way for people to check their ego when they are with me!
I flaunt my ego first muhahaha
Hey, I think that is a good idea.
So how would I replied?
Thank you?
You are too kind?
I think you have great ideas too?
No no.
I said. I also think so, many also say!
They usually laugh and move on and skip the niceties. Which I like!! lOl
I only do it with close friends, at my new workplace, I have not tried it
sillyinvestor,
Delete........
LOL!
When crash got sound, nothing matters any more except sentiments. Example the last GF meltdown, people were even willing to get negative interest for their money.
ReplyDelete/////////
"At some point during the afternoon, the yield on the three-month Treasury bill dipped below 0%, according to traders, as investor desire to hold short-term liquid debt trumps all else.
Year-end needs for liquidity probably play a part in this, according to one fund manager, but it’s still insane. “It’s the modern version of stuffing it into your mattress,” says Thomas di Galoma, head of trading at Jefferies & Co. “You just can’t make it up.”
temperament,
DeleteWe don't need to look at Europe or US.
Here in Singapore, by putting our money in savings accounts, we are getting negative real interest rates...
And that's 5 years after the GFC!?
Something is not right here when savers are being "punished" for doing the right thing....
The old adage of work hard and save hard has been usurped by Central Bankers....
They say payback is a bitch... That's what worries me.... And that has nothing to do with the markets.
History has its precedents.
Hi SMOL,
ReplyDeleteMy take on this:
1. Before we make a decision, ask why - motivation needs to be clear. I'm in the market to trade, not to invest for income though I may have small positions for investing. Income investors, like our oatmeal friend, will buy more when it translates to getting higher DPU and provided that fundamentals are still sound. That makes sense. For traders, averaging down is vulgar and even suicidal. Position should be closed at the pre-determined cut loss.
2. If I decide not to cut loss, that means the counter is still worth holding on but does not mean that it is worth buying more. Depending on whether the fall is across the board or just that counter though. If the market is tanking, I'll look for those stocks that have reasonably good fundamentals (e.g. strong cashflow, low gearing) but been beaten down a lot, which are the non-blue chips. Their turnaround tend to give much better returns than to average down blue chips. For example, I sold Cosco Corp after losing some $5+ per share during GFC and bought Ausgroup at $0.10 which I eventually sold at $0.30+. Didn't make good the losses but by not averaging down, I averted further losses.
3. Scaling in is done only when position goes in my favour. If price is going down, then I will scale in, not to buy but to short more! I think the concept of scaling in/out applies more to traders than investors.
4. Dollar cost averaging - for those folks who want to think of themselves as long term investors.
Endrene,
DeleteSpoken like a real trader!
We are pretty much on the same page as Motivation is under the purview of the Mind part of the 3 Ms - Method, Money, and Mind.
The EXECUTION of averaging down, scaling-in, dollar-cost-averaging can be the SAME; it's our thoughts and motivations that DIFFERENTIATE them.
Since what goes in our head is known only to us, hence everyone has to figure it out themselves which works better for them.
Hence I will not say to another person - NEVER AVERAGE DOWN!
But I can say - I hope you know what you are doing. Good luck!
As for point 3 and 4, I'll share in another 2 future posts what my own interpretations of them are ;)
Hi SMOL,
DeleteDo I know what I'm doing? I hope so too! But then, crash got sound mah, remember?
I'm thankful that I'm not all that lucky all the time. Luck breeds conceit. I have learnt humility from the market! Got out AFC in 1998 unscathed and in fact made a tidy sum to pay down the mortgage. But GFC taught me a good lesson.
Anyway, I'm clear where my end point is. I stake what I can afford to lose but I now keep in mind how best I can survive to fight the next battle. :)
Endrene,
DeleteIt's nice to know that in our small community, there's the few of us who are into REAL people REAL stories (stolen with pride from CW).
Not many newbies can fathom nor appreciate what you went through when you say having a 3 bagger does not even cover your prior loss; unless one has gone through that similar experience.
Any fool can profit from our successes; but how many of us can profit from our mistakes?
Nothing liberates us from our false convictions than a bear market!
Archoooo! Sniff, sniff... -.-"
DeleteEndrene and Jared, my fellow archers. Aiyoh, you people hor talking about me behind my back again. Make me sneeze early morning. Sniff... :(
After years and years of being in the stock market, I think that if I make money trading the market, it is mostly luck. If I make money in investments, it is probably because luck is on my side too. So, whatever we do, we hope we are lucky.
An instant noodles lover said that he rather be lucky than smart. I so agree with that.
So, no need to think so much lah. If we are lucky, do anything also make money. OK, time to buy some Big Sweep tickets. ;p
Hi AK,
DeleteNah...tissue to wipe your mucus. Don't sneeze so hard hor. Later your nose collapse. Oh, you never had plastic surgery ah? Then why wear mask in public huh? LOL!
Agree with you that many things in life are attributed to luck. Where we are born, who we meet, how we snag that higher paying job, etc are all part of luck. More so for gambling. The stock market is one big casino. I'm just striving to be a professional gambler with the hope that luck is always on my side. When it isn't, I hope I'm smart enough not to lose an arm and a leg again. I also say I'd rather be lucky than smart!
Hi SMOL,
Stories got different chapters. Most would tell only a chapter or two. I like the way you encourage people to write their own stories rather than repeat what has been told. Replicate the success of others? Who is the 'others'?
Personally, I revel less in success stories than those hard battles fought and lost. Mistakes are the best teachers. Unfortunately, I've been quite stubborn in the past, preferring to learn from my own mistakes rather than those of others. Got so many balukus until I got used to the pain. And the most scary part? To develop the thought that it is OK to lose everything! I realised I was losing my mind and I did a cold turkey. Stayed out of the market. But the restlessness got to me. So I changed playground and plonked my money into property. Like what AK said, no need to think so much, if we are lucky everything also can make money. I thank my lucky stars and guardian angel that I didn't lose money on the less-than-desirable property which I bought and sold.
All that stumbling along is part of my story which I gladly embrace. Now approaching 不惑之年, I often look back at my journey and smile - what an adventure! 不枉此生了 :D
人生,不就是潇洒走一回吗? Glad I have progressed from 孙子兵法 to 道德经。 :)
1) AK,
DeleteYou are the last to come here, so I am talking in front of you OK? (Know any lobang on how to get into law school with O' levels? As mature student? I am good at twisting logic and the truth. LOL!)
Shit! Now that you've reminded me, I must visit Kwan Im Ma at Waterloo Street soon to buy some flowers back so I can take a "flower bath"!
Must "heng heng" you know!?
Hee hee, I bought my Toto for next week oredi!
2) Endrene,
That's a good one on AK!
He must be wondering why "bo dai bo ji" kenna tag-teamed by us?
LOL!
" Academics analysed the wealth of thousands of households over four years and found that over just four years, those more inclined to 'shape their own destiny' had become £82,000 richer during the period."
ReplyDeleteNB:-
So who are the Lucky or Blessed ones?
temperament,
DeleteOpportunity and luck come to those who are "aware" to grab them?
The problem with too much planning and goal setting is that by putting blinkers on to have single-minded focus on our objectives, we lose our peripheral vision.
And luck and opportunity frequently appear at the corners of our eyes ;)