Pete Wargent blogspot
Co-founder & CEO of AllenWargent property advisory & buyer's agents, offices in Brisbane (Riverside) & Sydney (Martin Place) - clients include hedge funds, resi funds, & private investors.
4 x finance/investment author - 'Get a Financial Grip: a simple plan for financial freedom’ (2012) rated Top 10 finance books by Money Magazine & Dymocks.
"Unfortunately so much commentary is self-serving or sensationalist. Pete Wargent shines through with his clear, sober & dispassionate analysis of the housing market, which is so valuable. Pete drills into the facts & unlocks the details that others gloss over in their rush to get a headline. On housing Pete is a must read, must follow - he is one of the better property analysts in Australia" - Stephen Koukoulas, MD of Market Economics, former Senior Economics Adviser to Prime Minister Gillard.
"Pete Wargent is one of Australia's brightest financial minds - a must-follow for articulate, accurate & in-depth analysis." - David Scutt, Business Insider, leading Australian market analyst.
"I've been investing for over 40 years & read nearly every investment book ever written yet I still learned new concepts in his books. Pete Wargent is one of Australia's finest young financial commentators." - Michael Yardney, Australia's leading property expert, Amazon #1 best-selling author.
"The most knowledgeable person on Aussie real estate markets - Pete's work is great, loads of good data and charts, the most comprehensive analyst I follow in Australia. If you follow Australia, follow Pete Wargent" - Jonathan Tepper, Variant Perception, Global Macroeconomic Research, and author of the New York Times bestsellers 'End Game' and 'Code Red'.
"Pete's daily analysis is unputdownable" - Dr. Chris Caton, Chief Economist, BT Financial.
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Wednesday, 4 January 2012
Down down, deeper and down
US stocks started the year with healthy gains, and it’s easily forgotten that the US market was actually UP across 2011, by around 5% or so. No-one yet knows if this is the first sign of a market recovery.
The smartest investors make money in down markets too – some by short-selling stocks others by averaging down (sometimes also known as stockpiling).
One of Buffett’s favourite questions is: if you are going to be buying stocks for the next five years do you want the market to go up or down?
The right answer is: DOWN.
The reason: so you can buy more stocks at better prices. Counter-intuitive perhaps, but correct.
If you know the intrinsic value of a company is $50 and its price falls to $25, buy more. Easy!
The point is that price and value are not the same thing. Obviously, this entails knowing how to value a company.
The theory goes like this: you buy a stock at $50. It falls in price to $40 and you buy more, thus reducing your average cost per share. It falls again to $30 and you buy more reducing your average cost further.
When it returns to above $50, you have made healthy profits. Simple.
If you bought at $50 and it went up straight away then…happy days…so you win either way. Right?
3 ways that averaging down MIGHT stuff you up
1) Picking a dud company
If you had averaged down in to Enron (or General Motors, WorldCom, Ansett, Lehman Brother, washington Mutual, or....) you would have eventually ended up with a stock with $0. So, you’ve lost all your money there. Not ideal really.
In the Aussie market a lot of people seem to have been caught out averaging down in to Bluescope Steel (BSL) from above $12.00 all the way down to below 40 cents.
People thought that the losses the company made in the financial crisis would be reversed in to profits and it just hasn’t happened. Key lesson: turn-around stories don’t always turn around (so stick to companies making healthy profits).
“But Enron was profitable too?” – yes, true, but nobody understood what the heck they were doing and what derivatives they were using, not even the Directors of Enron. Key lesson 2: stick to simple businesses that you understand.
2) Finite capital
Not a problem for Buffett with his $50 billion stash, but it can easily be a problem for individual investors. If you initially invest 30% of your capital and then the price falls and you invest another 30%....you cash can soon all be used up and you become unable to capitalise on the lowest available prices. Step forward if this happened to you before…ah, Mr. P. Wargent esq.….
3) Losing your bottle
While averaging down is great in theory, it can be devilishly difficult to BUY when everyone else is panicking and SELLING.
“What do they all know that I don’t?” – sometimes the market might be right!
Again, experienced investors like Buffett have the confidence in their own opinions. Most average investors (yep, that’s us) look at the plummeting share prices and worry themselves stupid.
Averaging down: a great tactic but only for investing in great companies!