Should You Average Down A Falling Stock?

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.