Tag Archives: position sizing

Averaging Down as a Value Investor

Double down arrowEven the mention of averaging down among some investment circles will lead to a very quick and hostile education on their errors in your ways. Averaging down refers to a position entry strategy whereby the investor attempts to acquire more and more shares as the stock price drops. This results in an overall lower cost basis for the position, and allows more shares to be purchased than would have been possible with other methods, assuming a fixed amount of available capital. Those opposed to averaging down argue that you are only throwing money at a losing investment, rather than focusing on investments that are doing well. Which is correct? Let’s look at both sides of the coin. Continue reading

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Position Sizing at the Portfolio Level: Capital Allocation

Coins on a table

Traditional diversification advice dictates that individuals should own a wide variety of investments in their portfolio including a portion allocated to income vehicles such as bonds, a cash / money market position, and a minimum of 20 stocks. This post isn’t going to focus so much on the macro-level strategy of bonds/cash/stock, but will look at the number of stocks and ways in which capital can be allocated to them as a value investor.

There are two primary reasons to ensure a portfolio has adequate diversification. First, if any one company has a catastrophic event, we don’t want it to have a devastating effect on the investor’s entire portfolio. A 50% drop in a company’s stock makes a much bigger impact if it’s part of an equally balanced portfolio of 5 stocks, compared to another portfolio that holds 20. Secondly, various industries are cyclical in terms of their growth and by choosing to invest in companies from a wide range of different industries, it can serve to smooth our the ups and downs in an investor’s portfolio. Does it make sense to follow traditional diversification advice as a pure value investor? Let’s have a look.

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