After being there a few months (and putting in some very good returns) he called me and told me what he observed. He told me there were dozens of different funds there and some had been in business well over a decade. Some managers traded stocks, some traded bonds, some used fundamental analysis, and some simply traded throughout the day. But the only single thing the majority of them had in common was that they "scaled-in to positions". When they had conviction in a position, no matter what their style was, they bought more as price dropped. As you likely know, in most books this is taught as a recipe for disaster. Isn't it taught never to buy more lower? Yes, it is. And who teaches this? Not the best hedge fund managers in the world. These people buy lower, and if given the opportunity, they buy even lower (I remember one 30-year veteran of the industry telling me to buy a stock he liked, and to go home and hope it drops so I could buy more at an even lower price...this man helped create wealth for some of the most successful people in the country for three decades using this exact approach). http://www.tradingmarkets.com/.site...ow-To-Correctly-Buy-Stocks-And-ETFs-82582.cfm
Interesting. I wonder where this gentleman in the article found this hedge fund that allow competitors to work in their office and learn how they trade. Also, who is that 30 years veteran that the article was referring to? And how much money did he made?
Okay, here's the plan guys. Imma going to put your money wid me and when the stock drops I'm gonna buy more, now go home and and pray to Jesus that the price drops somma more so we can get in cheap. Got it? So far so good. I wid ya on this one. But when do we sell?
Great idea! Instead of selling the stock, we'll hold on to it forever. We could then set up a fund for the long term investors, raise cash, and then live off from the management fees. If anybody ask us about the performance, we'll just tell them this is a long term investment vehicle and short term performance doesn't count.
Averaging down is normally a recipe for disaster unless you have a well tested system and/or insider knowledge. http://articles.moneycentral.msn.com/Investing/Extra/BearStearnsPlungeTakesAlongBillionaire.aspx A guy on ET $CostAverageMAN took his 30 million account to 3 million averaging into the 2008/2009 plunge. He's now permanently "retired".
I think most institutional investors scale into positions, both because they don't want to move the market and to try to average in at a favorable price. Whether it is actually a good idea or not is open to debate, and it has been debated here endlessly over the years. The good side is you can often use normal market volatility to improve your cost basis. The bad side is that you can miss getting a full position on if the stock ramps up on you. Also, you end up taking stop losses with a full position every time. So you run the risk of not having enough stock of the ones you want and too muchof the ones you don't. Probably it evens out over time. For short term traders, averaging down is often thought of as some kind of death wish, but I think it has a role. The idea is to double up when the trade has moved against you almost to your stop. You are risking very little, provided you have the discipline to get out if the stop is violated. The benefit is you have drastically lowered your b/e point. If it gets back to b/e, you probably should count yourself lucky and exit. I wouldn't make a practice of doing this, and you have to have the discipline to dump the whole thing if it doesn't turn around, which can be easier said than done.
If you have time on your side averaging down is a great strategy and one I use all the time. Like any strategy though, it has it's drawbacks. Ask Bill Miller what it's like to average down into a stock like FNM. If you're gonna use this strategy you better know your shit.
As a trader, I'd sooner scale in as the underlying ramps up, running a tight stop. Adding more to a falling position is a recipe for disaster.