Purchase price or today's price

srcandas

Just interested in thoughts. No axe to grind.

I keep seeing posts suggesting that an investment that has dropped in value and showing a loss is ok as it was always for the long term. Is this ignoring the loss just a way of feeling better about one's decision (which is fine by me) or is there more to it? And does such thinking not make it harder to cut one's losses?

And something that has tempted me is buying more shares that have lost value as a method of diluting the current loss. Is there any theory supporting this as a strategy? Something tells me it is bad but I've done it once and it worked

:beer:

Derivative

The investment is worth its' price.

So if it has dropped in value, you have indeed lost money.

What does not necessarily follow, is that the investment itself was a bad idea.

If your original reasons for making the investment are still valid, then sticking with it is generally a sensible idea.

A biased example to make the point:

I offer you a special type of bet.
You can buy in for £1000.
Each day, I flip a coin.

Heads - your investment gains 1% in value.
Tails - your investment loses 0.8% in value.

After ten days, it is entirely possible that you could have lost 5.7% of your money. Tails could come up ten times in a row.

However, the long term expectation is that you will gain via the law of large numbers. After two years, the expected value of your investment is:

1000*((1.01)^365)*((0.992)^365) = £2014.01

I would like to make clear that the stock market does not follow the rules of my contrived example. It is not necessarily true that investments must rise, or even that entire markets must rise. I just wanted to give an example of how it can be a bad idea to cut your losses.

Ifts

srcandas wrote: »

I keep seeing posts suggesting that an investment that has dropped in value and showing a loss is ok as it was always for the long term. Is this ignoring the loss just a way of feeling better about one's decision (which is fine by me) or is there more to it? And does such thinking not make it harder to cut one's losses?

I agree the current price is the current price, regardless of where it was in the past. However I would like to point out that if a share is trading between a certain price range over a period of time (movements in price due to the market rather than news regarding that stock), and if it is obvious when charting the range then I would like to think it is important what you have paid for the share when it comes to selling it (along with other factors), i.e. you don't want to sell it when it is trading at the lower end of the range. And also when the markets are depressed like they are currently you are better to hold, esp when you are talking financial stocks which in some cases are oversold due to the panic in the markets.

And something that has tempted me is buying more shares that have lost value as a method of diluting the current loss. Is there any theory supporting this as a strategy? Something tells me it is bad but I've done it once and it worked

Ive done this before, recently done it when Tesco's went below £3.
The reason I would say for doing this is, if you have done your homework and are happy to buy a share at say £4 and then it goes down to £3, if the reasoning behind why you brought the share at £4 is still the same for you then why would you not buy at £3 when you were happy to buy it at £4. It helps to bring down the average price.

Another thing I would like to add is we are warned not to churn too much as dealing cost/commission only benefits the broker (I think that may have been wise when the markets were generally rising). But for the last 3-4 years I have forgotten the buy and hold approach (apart from some long term holdings for a decent divi), i see shares go up slightly on some good news (selling opportunity/lock in profits) and the next bit of bad news the prices fall (buying opportunity). So I don't worry too much about the commission paid to brokers in this current yo yo market environment, as long as I make more on my trades than I pay in fees.

As always what works for me might not work for you, each to their own I guess. There is no right or wrong way, if you have a system that works for you then thats what counts.

Good luck with your investments

srcandas

Ifts my concern with buying to dilute the loss is that I bought strangely Tesco and it fell. I bought more to dilute the loss as I still believed it looked good. But:

• I now was losing my portfolio balance and increasing risk
• If I had thought it was good enough to have double the volume why did I not buy double the volume in the first place.

Of course if I was drip feeding as a plan, say "I'll but Tesco 3 times over the next 3 months to ensure average price" then so be it.

Derivative I like the example. Although as you say markets and shares aren't like that (always going up) I have to believe the ones I buy will :rotfl:

Ifts

srcandas wrote: »

If I had thought it was good enough to have double the volume why did I not buy double the volume in the first place.

Sorry if I'm missing what you are getting at here, but I would say you didn't buy double the volume in the first place because the higher buying price did not warrant buying double the volume in the first trade.

sabretoothtigger

Its most obvious that a share price does not tell you company worth, when the cash balance of the company exceeds the total share value.

Thats happened quite often nowadays. They are separate dynamics, your ability to tell them apart is what makes a share cheap

Every purchase should be separate really, it can make sense to sell at a loss in order to put the money into a better company. Sometimes news makes it obvious they cant live upto previously held prospects.

If you'd switched from RBS to FRES in 2008 you'd have the money back by now and got dividends but just averaging down wasnt as profitable unless you got the bottom exactly

At this moment I think Sainsburys might be cheaper then Tesco. I havent the certainty to switch but if I put any more into the sector it would be with Sainsbury

Pachira

There is actually a trading system, called the "Martingale System" where you keep adding to losing positions :

This is a very risky method of investing. The main idea behind the Martingale system is that statistically you cannot lose all the time, and therefore you should increase the amount allocated in investments--even if they are declining in value--in anticipation of a future increase.

The Martingale system is commonly compared to betting in a casino. When a gambler using this method loses, he or she doubles his or her bet. By repeatedly doubling the bet when he or she loses, the gambler will (in theory) eventually even out with a win. Of course, this is assuming the gambler has an unlimited supply of money to bet with.

http://www.investopedia.com/terms/m/martingalesystem.asp#axzz1xCopcu1D


I should add that I absolutely do not recommend this as a strategy!