Invest
Average up or down?
By Singapore Man of Leisure  •  June 28, 2012
I have an ex-colleague who is now the tai-tai of one of the big luxury watch retailers in Orchard Road.
While entertaining overseas clients, she may bring them to one of our casinos. She never loses money there. OMG! How?
Her system is simple.
She will place a $100 bet on the roulette table on either black or red. If she wins, she got back her $100 entry fee. End of story.
If she loses, she will increase her bet to $200 on the same colour.
Lose again she increase the bet to $300 and so on.
So far, she always got back her $100 entry fee. Of course there was this one time she got a scary 12 rounds of reds against her…
I’ve written a tongue-in-cheek post on this topic of whip cream or leather whip.
But that’s for the “Mind” part.
Today I will be exploring the “Money Management” and “Method” parts (at least I’ll try). 
Money Management
To recover from a 20% loss (paper or realised it’s the same) we need to either hope our existing position goes up by  25%, or sell this loser and switch to a winner that gives us a 25% return.
To recover from a 50% loss we need a 2 bagger.
To recover from a 90% we need a 10 bagger.
 Mind you, it’s just to break-even – there’s no profit to speak of yet! 
 
Method
How many 10 baggers or 2 baggers have you got in your track record?
And please don’t tell me you never got any 25% realised winners before! (If you don’t, you may want to review whether DIY suits you at all. Outsourcing?)
Here it’s not what you intend or hope to do or accomplish using what not techniques or strategies. It’s what you have achieved. Period. 
Average down
Looking around me and at my own speculation journey, I found to do average down successfully, you need the below ingredients.
  1. Lots of new money coming in
Like my tai-tai example, if you have lots of new money coming into your investible funds every year.
You invest $10,000 into a stock from crashes from $1.00 to $0.10.
You average down another $10,000 at $0.10 and you just need the stock to “double” at $0.20 and you will make a small profit from your $20,000 bet.
  1. Good at picking multi-baggers
The above example is about the futility of making plans based on “what-if” scenarios. Mathematically it looks simple and plausible.
But again, look at your track record. It matters more than comparing others’ track records – be it from gurus or your peers. 
If you’ve never got a 2 bagger, what makes you think by putting extra $10,000 on a dead stock will make it miraculously double to $0.20? 
And if you have no new money to invest, you’ll need a 10 bagger just to break-even!
People celebrate when they’ve got a 10 bagger - $10,000 becomes $100,000!
We? $10,000 becomes $1,000 and then back to $10,000. How many years did it take for this wonderful recovery to happen?
We wouldn’t want to tell anyone since anyone who placed the same $10,000 in a savings bank would have beaten us. Shhh….
  1. Luck is on your side (Or you really are smarter than the market!)
I got my answer to whether to average up or down with my Greek tragedy holding in Jurong Technologies.
I could have cut at 20% loss. Huh! I could have cut at 50% loss. Humph! I could have cut at 90% loss. Hahaaaaa!
Noooo… I so very the stubborn and “smart”! Then it got to a big zero when it bankrupted and got delisted from SGX.
That’s a very expensive lesson on buy and hope!
Well, the silver lining is that I did not average down. Phew!
You do the math. Imagine you start averaging down at minus 20%; minus 50%; minus 90%?
Even if you can print money like Bernanke, worthless is still worthless.
Average up
Eh… I think you can fill in the blanks here with your own reflections using examples from your own track record.
Keep losses small
Those that did not have a long enough track record don’t worry. In time, you will understand why Warren Buffet says don’t lose money. And why not having a down year works wonder with compounded returns for Peter Lynch.
Traders learnt very quickly you can’t play when you have no chips.
Investors may take longer as we can hide under the “it’s for the long term denial”…
It does not matter what you call yourself – value, growth, dividend, long term, etc. It’s our track record that determines whether we are successful or poor investor.
How to minimise losses? It’s the Mind part of the equation. There are lots of system tools and hedging techniques. But if the Mind refuses to act, it’s all very academic.

Singapore Man of Leisure (welcome to my blog; just google it!)
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By Singapore Man of Leisure
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