Tuesday, July 12, 2005

Losers Average Losers: A Key Trading Concept--AVERAGING UP

Losers Average Losers: A Key Trading Concept

Paul Tudor Jones, Turtle Trader, keeps a sign posted in his office. It says, "Losers Average Losers". The concept of averaging up--not down has been around for a long time. One of the great proponents of averaging up was the great Jesse Livermore.

The concept is a simple and important one to follow; however, it takes discipline. The temptation is often great to buy more of a $10 stock when it falls to $8 and even more when it falls to $5. One should generally avoid buying a stock that is making new lows. In these situations the market may know something that you don't.

Jesse practiced his 20, 20, 20, 40 rule. He put 20% of his average position size into a stock and added another 20 only if the stock went up. If it went up more he bought more. Only after he invested 60% in the stock and it was still going up did he commit the last 40%.

Yesterday and this morning I averaged up several positions. The price of my average purchase went up because I bought shares at much higher prices than my original purchases. Too often, traders have the mentality that they have no profit until they sell a stock. This is totally false. One stock that I am comfortable buying modest amounts of today is Yahoo. It does not matter that I have a 500% profit in my first purchase. It does not matter to me that the stock sales at a high multiple to its earnings. I understand and believe that Jeremy Siegel is correct in his assertion that growth is not the primary determinant of total return. Logic is only part of the formula for making money in the market. I feel comfortable holding YHOO long term and therefore it is a good stock for me.

YHOO is one of the stocks that I might average down. For example if I bought shares today for $36 and later the stock dropped to $26 and stabilized, then I might buy more. I would not buy more just because the stock went down in price. However, I would buy more at a lower price if I still believed in the long term future of the stock.

With YHOO, I am half way to a 10 bagger. I have confidence that this one will become a 10 bagger. I hope to own the stock 30 years from now as a 50 bagger. My best stock so far is a 120 bagger.

Different stocks should be bought with different expectations. CAL traded in the upper 50's in 2000. The company has since lowered its operating costs dramatically. Business has been growing for a few years and in recent months load factors and revenue miles have been going out the roof. My "Old Merrill Pal" and I discussed our outlook yesterday. We figure the stock will exceed it old high during this business cycle. In other words, we believe the stock will trade in the 60's by 2010 or so. From the current price, this would be better than a 4 bagger. My families cost is not dramatically lower than the current price because we have averaged up aggressively.

The airline industry is very cyclical. We do not plan to own these shares more than a few years. Still we did not buy them on the way down. We waited patiently for the shares to make a bottom and then come back and test the bottom. Only after the stocks were "on the way up" did we buy.

One of the most famous gambling stories of all time was when a beginner rolled 9 straight passes. The beginner bet a $5 chip each time and made $40. Nick the Greek did not bet on the first to passes but he bet heavily the third and fourth pass and raised the bets thereafter. Nick netted a couple of million. The idea is that once you are onto a winning position you are playing with "house" money.

BUY THE BULL--BET BIG WHEN THE BULL IS RUNNING--AVERAGE UP! IT IS SILLY THAT THE OIL MARKET IS UP STRONG BASED ON ONE LISTING RIG IN THE GULF. THIS RIG IS A DROP IN A VERY LARGE BUCKET. SUVS ARE DOWN 19% IN PRICE DURING THE FIRST 5 MONTHS OF THIS YEAR--DON'T TELL ME THE MARKET IS NOT ADJUSTING TO HIGHER OIL. THE PRICE MOMENTUM IS ALREADY DYING. PRICES BUMPING AROUND FROM 56 TO 62 AND BACK IS NOT INFLATIONARY. ONLY INCREASING PRICES ARE INFLATION. OIL IS ONLY A SMALL PART OF THE FAMILY BUDGET. CONSUMERS ARE STILL SPENDING. STONG OIL PRICES ARE A SIGN OF A STRONG ECONOMY. PROFIT REPORTS OVER THE NEXT FEW WEEKS WILL SHOW THAT COMPANIES ARE DOING WELL.

1 comments:

Anonymous said...

You are an idiot.