Buying On The Dips

None of us wants to ‘throw good money after bad’ or ‘catch a falling knife’ but in just a matter of weeks, it is easy to look back and regret not buying some stocks when they were so cheap. Yes, we did chase many down as they fell and you’ll never hit the bottom till you know about it afterwards. However, in so many instances it is evident that is what you should have done (or could still do in many instances).

Take a worked example. So, a share is £1 and it drops and you rebalance your exposure by buying more as it falls. Say you see £1,000 as your chosen investment in that company. You start with 1,000 shares.

It falls to 70p – £700. You buy 428 more (£300) to reweight you to £1,000 (1,428 shares).

It falls further to 35p – £500. You buy 1,429 more (£500) to reweight you to £1000 (2,857 shares). So now your average buying price is 63p.

The shares rebound on a takeover bid and a suitor decides to offer £1 which is what they were worth before the trauma. Your holding is worth £2,857 against a total purchase price of £1,800.

Of course, some entities are on the way out and should not be bought just because they have fallen but there are innumerable examples of just this sort of volatile behaviour occurring this year and where share prices of companies and indeed some funds too reacted simply to panic and not the base fundamentals as clearly as perceived. Not only would the investor here have trimmed his overall breakeven price to 63p (still 37% lower than his original purchase) but for the Company simply to be valued at the same level it was at the start, he gains a handsome profit over the person who ‘did nothing’. I think the point is – would you consider taking such action (or just clamming-up in the face of such drops) and indeed did you consider it this year? The worst examples would be those who panicked so much they sold out at or near the bottom and would incur losses they could never retrieve.