How this one simple hack has helped me achieve >20% returns in the stock market
The Power of Averaging Up
“Average down on your holdings”
Ever heard this saying going around in the investment community?
While this is not wrong, there is a flaw in this strategy.
I call it “compounding your losses”.
Reducing our cost basis is a wise move, but when done on the wrong companies, it can have fatal consequences.
What would’ve happened if you had averaged down on Intel (INTC), with the intention of reducing your cost basis?
Stock price always follow fundamentals over time.
With Intel slowly losing its market share to the likes of AMD and Nvidia, it’s no wonder their share prices have been on a gradual decline.
Do this over time, and we’re just magnifying our losses.
As our losses get bigger over time, we then wonder what went wrong.
What we can do instead
For some reason, averaging down feels easier (and more popular among investors) than averaging up.
But we all know that good things don’t come easy.
So if averaging down is not the answer, is averaging up the solution?
It takes huge courage to be able to average up consistently, but this has been what has been working for me.
Alphabet (GOOGL) is one stock where I have averaged up on my initial position.
This is a stock that I have bought twice this year, with the latest purchase on 10 Sept 2024.
Before this year, I didn’t own a single share of the stock.
When I saw that the stock price had multiple declines, without any fundamental change in the business, I knew it was time to act.
It’s psychologically hard to average up, especially when our initial purchase was at a cheaper price.
The refusal to pay anything higher than our initial purchase price can prove to be a costly mistake.
Due to our stubbornness, we miss out on all the future gains that all these wonderful companies have to offer.
Conclusion
Evaluating buying decisions based on stock price movements can be dangerous.
The intrinsic value of high quality stocks go up over time.
When I first bought Alphabet (GOOGL) stock back in March, its intrinsic value was $175.
The company’s intrinsic value is now $198 as per my latest calculations, an increase of 13% in a span of 6 months.
Just cause a stock has risen doesn’t make it expensive.
On the flip side, just cause a stock has fallen doesn’t make it cheap.
Perhaps in 6 months, there’ll be another buying opportunity at a “higher” share price?
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