Averaging Up or Down- My Experience

As I was reading an article on this topic by one of my favourite bloggers,Musicwhiz, I was reminded of  my own experience in dwelling on such activities or shall I call it "plunging" into them?

It was in early 2007, nearly a year before the global financial crisis. I met with an accident and had to stay home for almost a month. As I sat in front of my computer with my left leg in a plaster cast, I noticed that the market was in an unusual vibrant mode, call it a bullish trend if you like. I had much earlier bought some "Renong" shares which was later converted to UEMworld and the unit cost then was 1.25. This counter suddenly became active and as it was going up, I kept buying without really understanding the principle of averaging up, mind you. Had I known the risk I would have been in fear and more careful.

My effort was well rewarded though, as by the time I sold off all of my UEMworld shares at 4.40, I had made a small fortune all in a matter of eight weeks or so. I was extremely pleased with myself and that rather massive gain was used to buy other shares and make up my variety of portfolios. Well, it was a success story, one based on instinct rather than a careful study of the fundamentals of the company. Certainly not to be emulated by anyone worth his salt. Average up and gain?

Then in the first quarter of 2010, as I was looking at the trend of the various sectors in the market, I noticed that the technology sector was doing relatively well in rotational plays. The new kid on the block, JCY whose IPO was at 1.60 had even gone up to 1.98. Then suddenly JCY, along with the other technology stock prices like Notion, started to fall. Mindful of the possible opportunity to buy low,  I went headlong into the market and bought JCY shares at 1.52, well it was below the IPO price wasn't it? Then it fell again and I kept buying  till I realised that I was putting my money into a bottomless pit  and ceased averaging down forthwith.

The Greek sovereign debt woes and worries on its contagion effect as well as the fall in demand for hard disks had battered down the technology stocks and I came by the news rather late. I lost a substantial sum of my hard earned money on this stock when my broker advised me to dispose all of it early this year at 0.58 sen. Luckily I followed his advice as a few weeks later it still continued to fall and now I think it is at 0.40 sen. Certainly nothing to be celebrated. Average down and lose!

I used the proceed to buy the Pchem IPO in trading and service sector and as luck would have it I was successful and able to compensate for the loss when this newly acquired stock went up by RM2.00!

In my little experience ,averaging up in a bullish market proved to be lucky and lucrative despite the apparent risk and my averaging down, while seemingly clever, in a volatile market still in the shadow of the recent GFC (global financial crisis) was disastrous. And my final disposal of the technology stock at a great loss was a fortunate decision as it went down still lower and would have suffered greater losses had I held on to those shares. And my good luck with Pchem had single handedly turned around my financial status.

There was an interesting comment which pointed out that if you keep averaging up, you are a masochistic (pain-loving) and if you do the same by averaging down you are a hedonistic (pleasure-seeking). Tell you what, when I was performing those two actions I hardly thought of the pain or pleasure.... I was just having fun with Mr Market!