I guess the question above would be particularly applicable to value investors, as they often know and understand their own companies best over a period of time and thus are often faced with the question of whether to purchase more shares in these same companies. An investor would be confronted with the simple question of whether he should average up (i.e. purchase shares at a higher price compared to his original purchase) or average down (purchasing at a lower price than his original purchase in order to reduce his overall average cost per share). Let’s analyze both situations to see what insights can be gleaned as to the actions to be taken, and also the ramifications and consequences of each action.
Averaging Down
I guess this would be viewed as a simple decision – to purchase more shares in a company in order to reduce the cost of your ......