Let me talk to those who believe that averaging down stocks, especially the ones with good fundamentals, is a good method. “Ummmm… hey there! What’s up?These people who keep saying to cut your losses and never average down are so annoying. They make your blood boil. They should just mind their own business. I mean, duhhhhh….This is our port!”
Now, let me talk to those who don’t like to average down. Those who likes to cut their losses. “Hello…you see those traders that don’t cut their losses? I know right! What a loser. Down na 20 percent hawak pa din…My goodness!”.
Now let me talk to the both of you. Let me take you to a journey. Let me show you facts. Let us say you bought MAXS on Nov 13, 2015 and averaged down until Jan 26, 2016 ending up with 30,000 shares with an average of 18 pesos per share.
You now have 30,000 shares with an average of 18 pesos which is 540,000 pesos if MAXS was at 18 pesos (tax and fees not included) but MAXS was 13.4 pesos noong Jan 26, 2016 so the value of your shares nasa 402,000 pesos lang which means you have 138,000 paper loss. Umakyat ngayon si maxs.
Nagbenta ka nung umakyat si MAXS sa halagang 34 pesos per share meaning ang 30,000 shares mo ay 1,020,000 pesos na ang halaga. Yung investment mo was 540,000 pesos. Kumita ka ng 480,000 pesos.
Kunyare naman bumili ka ng 1000 shares ng MAXS na stock noong September 1, 2016 sa halagang 32.5 pesos. You averaged down until May 18, 2017. You now have 30,000 shares ng Maxs with an average of 25 pesos. That’s 750,000 (no tax or fees ang calculation para madali.) Nasa 18.46 pesos si MAXS noong May 18 meaning your 30,000 shares is only 553,800 pesos which is may 196,200 pesos na paper gain. Malaki loss mo. If you stopped buying MAXS at naghold ka lang until today, you now have 372,000 pesos worth of maxs shares with 378,000 pesos paper loss.
Kapag bumili ka ng stock you are anticipating or expecting na tataas ito. Wala naman siguro bumibili ng stock sa market para malugi. When things don’t go as you expected some cut their losses quick. They admit na things did not go as they wanted. They admit na nagkamali sila . They sell their shares and they move on. Meron naman na bumili ng stock and things did not go as they expect it pero instead na aminin na nagkamali sila ay bumibili pa sila ng mas maraming stock para dumami hawak nila at bumaba average. People do not like to admit that they were wrong about a choice once they have made it. Therefore, rather than conclude that they made a bad choice, they convince themselves that the choice was right and that since the stock has declined it is a better deal now than it was originally. In a state of denial, they buy more of the stock that declined. Averaging down sa isang stock na tumuloy sa pag bagsak is the worst idea. Averaging down sa isang stock na nag rebound at umangat pa sa dating all time high is a good idea. Cutting your losses on a stock na bumaba at nagrebound sa mas mataas pa sa all time high is a bad idea. Cutting your losses sa stock na tumuloy sa pagbaba is a good idea. Choose ka lang ng lesser evil diba?Both are poison choose ka lang which one ang gusto mo. Tama ba? Nope! There is a third option pero bago nun i will make one thing very very clear. Real investors don’t average down losers. I know you will hit me with Warren Buffet quotes. I will take that but please know that I love Warren Buffet. I never did and never will disrespect him. I don’t appreciate some traders making fun of Warren buffet or any value investor. If a person is richer than you or doing better than you in life, you don’t really have the right to disrespect them plus I just really admire Warren Buffet. Going back sa topic, you will probably hit me with this quote “If you liked it at $10 you should love it at $6 if it goes down.” A few years ago, back when my mom was still head of a certain investment firm, we would always have this little cute arguments. She would often quote Warren saying “If you liked it at $10 you should love it at $6 if it goes down” Then I would often say ” if you loved something at $10 and you were wrong, you might love it more at $5 and you almost as likely to be wrong, and like it more still at $2 and could equally be wrong.” When some people use Buffet’s quotes to justify why they average down they tend to forget a fact that Warren buffet started as a trader not as an investor as you know him now. A-huh. That’s right! Way before pa niya na meet si Benjamin Graham. Nasa 11 years of age siya nung nagtrade sila ni Dorris yung sister niya and I’m not sure if most of you know this but yes they bought six shares of Cities Service, an oil service company, at $38 a share. The stock fell hard after a few weeks at nag away sila ng kapatid niya. Wala siyang choice but to hold the stock. It went back up. He sold at $40 per share. The stock went to as high as $200 per share eventually. There are a lot of information and understanding na nalolost sa mga bagong traders/investors ngayon. Let me tackle it a bit kasi I really love Warren Buffet plus gusto ko din alisin ang mga ignorant ideas at statements na lagi ko nakikita sa mga long term investors or sa mga day traders. How did Buffet become rich? Saan galing pera niya? Paano niya napalobo ang wealth niya? He owned insurance companies within his conglomerate and could invest their “float”—the premiums they take in but don’t have to pay out in claims right away. Insurance float is the bread and butter of his wealth. He has used these money to create his vast empire and allow him to invest in or buy outright great companies like Geico, American Express, Coca-Cola, Wells Fargo and recently, Apple.
I think most of you don’t know what float is so explain ko muna. In the insurance industry, “other people’s money” is known as float. We are all familiar with the terms premiums and claims, they are both the money that we pay every year for an insurance policy, and the money paid back to us when we have an accident, medical, or other circumstances. Saan ba napupunta ang pera na binibigay or hinuhulog niny sa insurances? (Dali ask your insurance agent/financial advisor) Insurers don’t pay out all the money right away. Instead, an insurance company will collect money in premiums, invest that money, and pay out claims as needed in the future. The difference between premiums collected and claims paid out is the insurance float. It is very similar to how a bank will collect deposits, invest that money (through loans), and then will repay that money in the future with a withdrawal . You don’t believe me? Here is what Warren had to say about it:
“Insurers receive premiums upfront and pay claims later. This collect-now, pay-later model leaves us holding large sums — money we call “float” — that will eventually go to others. Meanwhile, we get to invest this float for Berkshire’s benefit.
If premiums exceed the total of expenses and eventual losses, we register an underwriting profit that adds to the investment income produced from the float. This combination allows us to enjoy the use of free money — and, better yet, get paid for holding it. Alas, the hope of this happy result attracts intense competition, so vigorous in most years as to cause the P/C industry as a whole to operate at a significant underwriting loss. This loss, in effect, is what the industry pays to hold its float. Usually this cost is fairly low, but in some catastrophe-ridden years the cost from underwriting losses more than eats up the income derived from use of float.
Our float has grown from $16 million in 1967, when we entered the business, to $62 billion at the end of 2009. Moreover, we have now operated at an underwriting profit for seven consecutive years. I believe it likely that we will continue to underwrite profitably in most — though certainly not all — future years. If we do so, our float will be cost-free, much as if someone deposited $62 billion with us that we could invest for our own benefit without the payment of interest.”
Warren went from having a trading business with her sister to learning value investing to being known as a buy and hold investor to a Warren Buffet The Billionaire that we know now. He often tell people to be an investor rather na maging trader which is totoo naman na if ikaw siya walang sense maging trader. If ako din siya I would buy and hold. Why? Sige kuha ako example. Here:
Sample si Tech. Sa loob ng dalawang taon more than 90 percent binagsak nito. May market cap si tech na 1.7 Billion. May shares outstanding na 419M. Public float requirement ng PSE ngayon is 15% at by 2020 magiging 20% na. Okey, since mostly newbies nagbabasa ng blog ko explain ko. Market cap—or market capitalization—refers to the total value of all a company’s shares of stock. It is calculated by multiplying the price of a stock by its total number of outstanding shares. Outstanding shares or shares outstanding refer to a company’s stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders. The float is the number of shares actually available for trading. Float is calculated by subtracting closely held shares — owned by insiders, employees, the company’s Employee Stock Ownership Plan or other major long-term shareholders — from the total shares outstanding. At the right price, of course, the closely held shares may start to float. Funny how that works. If ako si Warren (assuming na pumasa si Tech na checklist ko as a value investor which in reality di naman papasa si tech but para lang as example) I will buy Tech. Let us do the extreme. I will buy tech more or less kunyare 300M shares. (Let us ignore merger rules at take-over rules) If I own 300M shares out of 419M outstanding shares and I decide to not do anything. The price can go up or down but in reality I do have control over my investment. That is one example. Another one example is if I want to sell Tech di ko ito mabebenta ng hindi ako lugi sa ngayon so I don’t really have a choice but to hold. So, I buy and hold. Sa pag buy ko naman. Sa mata ng average trader sa time na bumibili ako Tech, it looks like I bought sa taas and nag average down ako well in fact im buying little by littel kasi any big buying will affect the price. If out of nowhere I posted a 100M shares na buy order sa 4.5 pesos for sure mabilis na lilipad ang Tech pataas. Warren don’t want to be a trader and he really can’t be with his large positions on his holdings. Can you imagine what will happen to coke if warren decided na TP na hahaha. It will fall really hard.
Let us stop talking about Warren and go back to averaging down. I presented you with two options. One is average down and the other one is cut your losses. Let me present you with the third one. This one tawag namin Cathy. When we say “Cathy ako kay NOW” or “Cathy ako kay ISM” it means I cut my position and nag re-entry. Here I will show you. Same stock na Maxs gamitin ko.
You cut your losses and re entry. Exit then re entry.
You will avoid a 45% loss, a 7% loss and a 15% loss.
You could have gained 61%, 15% and 14% at the very same time. “Wala naman ganyan. Wala naman makaka time sa market ng ganyan” Well, look here:
If done properly you could still have a 6% and a 2% gain nung downtrending siya and you could have avoided a massive loss (yung red pababa) which was around 30%+.
I told you before na I will show you facts. I showed you facts. Now let me give you my opinion. Una sa lahat we will never have a conversation about averaging down if hindi bumagsak ang isang stock tama? Okey. Your only argument is kapag umangat ang stock mababawe mo loss mo or kikta ka pa. That’s your only argument sa facts ko. Yan lang ang pwede mo sabihin. If that is your only reason answer this: Paano ngayon if hindi umangat? Di ka lang talo, dinagdagan mo pa talo mo sa kaka average down. You see my point there? “Eh bluechips lang naman ina average down ko. Ganda ng fundamentals.” Ok lets take a bluechip stock as an example.
If you bought URC at 210 and started averaging down and end up with 30,000 shares with an average of 180 pesos per share. You will have papaer loss right now kasi 145 na lang si URC. That’s three years of averaging down. Three years is nothing huh? Okey. Watch this.
If you bought TEL at 2800 pesos and started averaging down until today and you have 30,000 shares with an verage of 1800 pesos per share nasa loss ka big time kasi TEL is now at 1,035 pesos na lang. That is a whooping span of 8 years? Eight years of averaging down. “Eh yung example mo are panget bluechip stocks” Your argument is already invalid. Bago maging bluechip yan may papasahan muna na criteria yan. You cannot call them panget kasi if panget yan ntanggal na yan sa rebalancing pero sige for the sake of argument entertain natin. Let us find “good” bluechip stocks.
JFC ok ba yan? Jabi yan eh. Yung green di kasama sa usapan kasi di naman averaging down yan. Dun tayo sa red. That don’t look good noh?You probably do what? ten charts a week, maybe less? I do a minimum of 200 charts per day on my lazy days. I did 400 charts today. I scan them. Plot mama. Look. Observe. After one batch of PSE stocks from A to Z i will do another from Z to A. If you look closely you would see na Averaging down would have worked as 2008 happened. Remember 2008? Nope? Di pa kayo nagtitrade that time? Well, that’s ok. 2008 was baaaaad! Pansinin ninyo. You will see a different picture back then mula lets say 2009 to 2016. Some strategies used during those time would not really worked now. Let us go back sa Averaging down. Let us be honest here ha. If given a chance you won’t really be averaging down di ba? If alam mo babagsak ISM di mo naman bibihin di ba? “Mga pangako ng third telco!” I don’t blame you for buying it. I really don’t. The only reason you are averaging down is dahil naipit ka na. Tama? As I said walang tao na pumasok sa stock market para malugi. Na ask mo na ba sarili mo ”Bakit ba talaga ako nag aaverage down?” Hindi pa noh? I will answer it for you. Nag aaverage down ka kasi wala naman nagsabi sayo na hindi tama yan. Wala naman nagturo sayo na mali yan. Normal reaction mo yan. Tao ka. Takot ka magka loss. I think this is a sensitive idea na hindi narerealize ng mga traders na panay mock sa mga nag aaverage down. Hello. Akala ninyo ba gusto nila mag average down? Akala ninyo gusto nila malugi? You were put sa sitwasyon na wala kang laban. Nag aaverage down ka kasi gusto mo bumaba average mo kasi malaki na loss mo. Kapag bumaba average mo at sakaling bumalik sa dating price ang stock na hawak mo break even ka or may tubo pa ng konti. Let me tell you this though. Hindi ko sasabihin na mali ang pag average down mo pero if loss ka pa rin ngayon let us agree na what you are doing is not working. Can we agree on that at least? Okay, good. Now, let me help you. Stop mo muna ang pag average down mo. For now lang. Di ko sinasabe mali yan ha. Stop mo lang muna. Let me teach you paano mag cut muna at mag re entry. Okay ba yun? Wag mo muna galawin ang losing stock mo. Stop muna sa average down. Let me help you paano ang pag Cathy and by the time na ready ka na you will do what is right sa hawak mo na stock. Here is what I want you to do. Prepare 8,000 pesos. Make it 24,000 pesos. This is not a payment for anything. I’m already rich. I actually don’t consider myself rich. Lets just say I’m ok financially. Prepare 24,000 and go join Traders Lounge. That’s the amount you will use to buy three stock kasi minimum 8k pesos ang halaga na hindi ka talo sa fees sa PSE. Read up about our so called 8K challenge over there. Learn from our weekly lessons then read up the 8k challenge. Do the 8k challenge. I guarantee you kapag natapos mo yun you will have a different outlook in trading. I won’t say you will be a great trader but I can say na you will have a better trading result than before you went in. I told you i will tell you facts di ba? So here:
Result yan ng isa sa mga nagtake ng 8k challenge. Marami pa ako screenshots ng port ng traders na nag improve. You can also verify them. They had losses then bago sila nagtake ng 8K challenge and now they are improving. That’s all there is. Improvement. I hope you learn something from this blog post. See you all in Traders Lounge.
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