Answer to question: I have shares of XYZ Company at some price and it has fallen 20-30%. Can I buy more of XYZ at these levels or wait for some more correction before buying.
When market slides, one question that is very common is –
I have shares of XYZ Company at some price and it has fallen 20-30%. Can I buy more of XYZ at these levels or wait for some more correction before buying.
Similar questions are being fired to every blogger and Manshu of onemint wrote don’t average down and compound your problems.
Let me show you what Manshu is trying to explain in his article with an example. Read my post Multibagger Stock Idea – Gateway Distriparks Ltd.
I was not very bullish on the market when I published that post and so I had very small investment in the stock just to make sure, if there is correction in the market and if the stock does not breach the support of 140 I may add more to my position at the same pricing 144. The idea behind the small position was not to average at lower levels.
Once stock traded decisively below 140 on 14th November 2011 I was out of it. As of today the stock is trading around 125 and I have easily saved myself 15 Rs per share. If I want, I can get into the same stock at a lot lesser price or may be at the same price of 140 depending on what charts tell me.
You can argue that what I am saying is about the small cap and mid cap stocks but what about investment in the blue chip large cap stock which has fallen 20-30% and so should I average them or not.
The answer is still NO because I am not a fan of averaging even the blue chip companies at lower levels. I average them at higher levels. As of now what I prefer when the market is falling is – See if the blue chip companies can cross major resistance levels and if they don’t which is more likely I try to come out of those stocks and then buy them back again at the support levels or lower levels. See how I trade my Long Term Investment Portfolio and profit from it.
Don’t average and earn more but you can earn by selling your positions and then buying back at lesser price and pocketing some cash. Share your views and feedback in comments below.
HI SIR CAN WE AVERAGE ,MUTUALFUNDS OR INDEX FUNDS. WHEN MARKET IS DOWN LIKE 10 TO 20%. THANKS SIR
Yes you can. That should be a good decision instead of averaging down a stock.
THANKS A LOT SIR. RAMADAN MUBARAK
The pleasure is all mine.
Averaging is a good step to reduce purchase price and can be of great use in fallen market. I do practice it at every occasion.
thanks a lot pnkeshari sir
What is corretion in market actually mean?
Correction in market means a decline or downward movement of a share price and checks the upward trend temporarily.
I have GSPL 50 shares @ 88.75 with me kindly advise whether to hold or sell
Mayuresh, I have no clue as to what was your purchase objective.
HI SHABBIR,
I WANT TO KNOW WHAT IS PIVOT POINT AND HOW WE CAN CALCULATE A PIVOT POINT OF A STOCK.
Point where stock reverses many a times and for calculating those pivot points you need to understand support and resistance for the stock.
Thanks a lot Shabbir for the detailed explanation….I am learning a lot from your posts and detailed analysis.
Recently I missed out buying Tata motors when it fell to Rs. 161.
Now it is Rs. 181…..
Hi Vinay, the pleasure is all mine and don’t regret the miss trades but focus on future. Yes definitely learn from the misses to the extent you can.
Hi Shabbir,
The above post is very useful.
I have few queries:
1. For long term investment, in say blue chips or large caps, what stop loss levels in % terms one needs to set?
2. Do the stop loss levels need to be set according to the investment timeframe i.e short term or mid term or long term or in price depreciation say 20% from current price irrespective of timeframe?
3. What strategy does one need to follow for investment in blue chips for long term?
Accumulate at beaten down levels on regular basis or put lump sum at their lowest levels (which is hard as it is difficult to predict the bottom)?
Hi Abhijit, the pleasure is all mine and here I have my answer to your questions.
1. Stop loss is always trailing and the first support for the stock should be used as stop loss.
2. Not a general rule of 20% but using support and resistance levels.
3. Strategy for investment that I follow is buy at 2 pivot points. First is support not breached and second is breakout above resistance.
I never buy beaten down stocks as investments (but yes may be for trading pop) because those beaten down stocks needs to have buyers where it finds supports.
The “average-your-stock-when-price-falls” is a popular slogan conveniently flaunted by stock tip providers as well as broking houses. For the tip provider, it is an easy way of pulling the wool over your eyes and making you believe that his tip was still a great tip, and if he was wrong, it is your duty to buy more of the same stocks!!! And for the broking house, it doesn’t really matter what you buy or sell, doesn’t matter if you make a profit or a loss, as long as the bulk of their business remains constant (if not on the ascend) and therefore, “buy more of the same stocks if the prices of the stocks you’ve bought are now nose-diving down the dungeon” is a convenient refrain for them too.
I have not seen a single broking house that does not make a call to you to suggest that such and such stock is a good bye or a good sell (if you have it in your portfolio) when they find that you have not been actively trading for a month or two.
About an year ago, when Infosys was the apple of the eye for the IT sector, there was this teeny-weeny girl from my broking house (one of the best in India) who so kindly offered me her advice that since I was already having a profit in Infosys, I should sell the stock and buy HCL Tech as according to their in-house research group, HCL Tech was poised for a big leap. I saw through their game plan, thanked her politely, but said a firm “no”.
Let’s try to understand that they –the stock-tippers and broking houses- care a hoot as to whether you make a profit or a loss. All that the broking house wants is to get you to trade so that their commission keeps rolling in. And all the stock-tipper wants to do is to place the blame on you for “not averaging” when prices fell, rather than take it on himself for making a bad call. But they’ll do their best to try and make you believe that their advice is in the best of your interest.
Regs,
Paul.
Hi Paul, I completely agree with you on this and I have also been in talk with one more user who has burnt his hands with such tips and even consider I also do the same and want to get lot of things verified. I am time and again saying I never share stock tips but share how you can use the knowledge of market and sentiments.