Q: Question about averaging down or buying on major dips.
I have seen the comments "we don't like averaging down" on a number of occasions.
If I consider a stock like AHF, which I believe you liked when you prepared your report on this company and still like today, what would be wrong with averaging down (assuming we keep our stock weights somewhat in balance and possibly increase our exposure a little bit).
The way I read your Q&A to AHF is:
- The fundamentals have not really changed. In fact, they are possibly better. The focus is on higher margin business.
- The dividend (7%) is secure with good cash flow. (This is a great dividend which we can collect while we wait for the stock to go higher. Not many companies pay 7%.)
As a result:
- If we buy the stock at this price, our risk is greatly reduced. The stock is selling at 70% the price it was recommended at and your opinion of the company has not changed. It is like going to the store and buying stuff on special.
- If the stock goes back to the price it was at when recommended ($1.22), that is 42% upside. If we assume it takes 2 years to do so, that would be a 21% annualized gain, plus about a 7% dividend per year for an annualized gain of 28%. And this assumes the price only goes back to the price it was initially recommended at for purchase.
If averaging down is not a good thing, when fundamentals are same if not better, and our risk of financial loss is lower (as preservation of capital is paramount) and the dividend is exceptional... Then as some people would say, is it not time to back up the truck, is it not the time to be greedy when others are fearful...
And if it is not a good purchase at time price, then should we not get rid of it and move on.
Your valued opinion is greatly appreciated. I've learnt a lot.
Thank You.
I have seen the comments "we don't like averaging down" on a number of occasions.
If I consider a stock like AHF, which I believe you liked when you prepared your report on this company and still like today, what would be wrong with averaging down (assuming we keep our stock weights somewhat in balance and possibly increase our exposure a little bit).
The way I read your Q&A to AHF is:
- The fundamentals have not really changed. In fact, they are possibly better. The focus is on higher margin business.
- The dividend (7%) is secure with good cash flow. (This is a great dividend which we can collect while we wait for the stock to go higher. Not many companies pay 7%.)
As a result:
- If we buy the stock at this price, our risk is greatly reduced. The stock is selling at 70% the price it was recommended at and your opinion of the company has not changed. It is like going to the store and buying stuff on special.
- If the stock goes back to the price it was at when recommended ($1.22), that is 42% upside. If we assume it takes 2 years to do so, that would be a 21% annualized gain, plus about a 7% dividend per year for an annualized gain of 28%. And this assumes the price only goes back to the price it was initially recommended at for purchase.
If averaging down is not a good thing, when fundamentals are same if not better, and our risk of financial loss is lower (as preservation of capital is paramount) and the dividend is exceptional... Then as some people would say, is it not time to back up the truck, is it not the time to be greedy when others are fearful...
And if it is not a good purchase at time price, then should we not get rid of it and move on.
Your valued opinion is greatly appreciated. I've learnt a lot.
Thank You.
