Let’s say you bought a stock because the fundamentals looked solid, but then it dropped 10%, 20%, or even 50% over the next few weeks or months. What would you do in that case?
In theory, if nothing has changed fundamentally, averaging down makes sense. But sometimes it’s hard to tell if you missed something during your original analysis, and that’s why the stock is down.
Would you sell and cut your losses, hold and wait it out, or buy more?
Are you doubling down on losing stocks if fundamentals still look good?
byu/wojack ininvesting
Posted by wojack
22 Comments
The price of your shares should not sway your decision. If nothing has fundamentally changed, I won’t sell because the shares just arbitrarily dropped. I had a large position draw down 30% and I decided to average down.
What is your definition of fundamentals?
Ive done this before and it usually works out
If it’s down 50%, something has changed. Now maybe it’s still a solid investment but if you can’t identify what changed, you shouldn’t be doubling down.
10-20% is normal variation in a stock so I wouldn’t consider than particularly meaningful.
If a stock dropping 50% doesn’t excite you, then dont own it. Because eventually it will drop. And if you’re not excited to buy it at a discount, then why own it at all?
I set a limit when I buy a stock. My first purchase is never more that 50% of the limit. If it goes down, I wait a while to see if there is some news I missed than I buy more.,
Give it some time. Don’t average down immediately.
Obviously, this only a applies to value stocks. They have to have low PE ratios.
If you buy stocks with PE of 30 or more (I would not consider it a value stock), it could decline 50% as still be overvalued.
If next quarter and the quarter after continue to improve then it could be a sign to double down if you like what you see, but you also need to understand their product and see what they are guiding for and believe that
I would be worried my original thesis was right.
Are the fundamentals really sound, or did I fall for some hype?
Also something must have changed, stocks don’t drop 30% for no reason.
Also valuation. If you look over the financials and they look good, little debt, solid 15% yoy earnings growth, good moat, solid management. Sounds good right? Well if it’s trading as 200 PE that 15% yoy growth isn’t going to cut it.
Basically I would double check my thesis and really question what the market sees and I don’t. Like I said stocks don’t drop for 30% for no reason.
My first step would try to find out why the market priced it 30% lower and go from there.
Also one thing to do is try to pretend you never bought the stock. Today knowing the information you do, would you buy it at this price? Meaning you being down 30% or up 30% shouldn’t affect your decision to buy or sell. Do you still like the stock at the current price is all that matters, the amount you are up or down shouldn’t matter
Could you give us an example?
I don’t doubt you, but I find it hard to believe that a stock has dropped up to 50% without a change in fundamentals, especially given this bull market that we have.
There has to be some thing like it was already overvalued to begin with or there is some serious rerating
I was a few clicks away from selling TASR (now AXON) many moons ago after being down over 50% as I didn’t have much money in my portfolio back then and felt I needed to preserve what little I had. I remembered someone saying, before you sell something for a loss ask yourself if you’d buy it at that price. My answer was yes I’d buy it. So I literally doubled my position at $4.65/shr which took a lot of fortitude on my part. It’s now up over 7,000% even after a rough couple months recently.
Start small, think big, scale fast. Be strict with limiting losses and only average up. Never lose more than you would on a spend on gift or a bad date, and only average up. On the authority of Paul Tudor Jones I caution you: Losers average losers.
Kinda a dumb hypothetical without real life examples
How good are you at determining that the fundamentals are good?
Yea, like NFLX right now.
Stocks or etfs
Mda space was my 50 percent drop but still believe in the stock.
Ok… so what did you buy?
Yeah so thats the billion dollar question, is the stock dropping because of irrational markets or because of legitimate concerns you are not yet aware of? I’ve seen it run both way. I can’t exactly answer this except to say this.
1. Be careful. The market is likely a lot smarter than you are. Assume you are wrong until you have exhausted every possible argument against you.
2. Be mindful of your portfolio. No matter how attractive a stock looks I always want to maintain some semblance of balance so I am not too overweight in anything.
3. Compare your stocks performance against competitors and relevant indexes to see if these are market shifts or shifts limited to that company specifically.
4. Always stop to ask yourself, but what if I’m wrong? If the costs of being wrong are too high you might want to take a step back regardless of whether you think it’s a good deal or not. There’s nothing worse than losing money and unfortunately it’s much easier to lose than gain back.
Eventually I will learn to cut my losses after a 10% pullback.
I am surprised I have any fingers left with all of the falling knives I have tried to catch.
Your exit should be determined before you buy. Normally I use a 25% trailing stop so I don’t take 50% losses.
Some stocks I have no t.s., BRKB for instance I use no t.s. and buy the dips.
That’s called a sale. Buy on the dip if you have a good reason to like the stock.
i opened a position in GH at 48 and doubled down at 35, now it’s 100. posted that it would double when it was 50 in this sub