Drone Services USA Inc. (DSUS)

[Cassandra]

Psych 106: Never Average Down In A Losing Stock

By Donald H. Gold, INVESTOR'S BUSINESS DAILY



(Part 6 of Investors Business Daily Exclusive Series
Hope, Fear And Greed: Psychological Barriers To Successful Investing)

Averaging down in a falling stock is like lending money to your brother-in-law.

Your wife insists, so you write a check. Months later he needs more money. You may lend him more, but you surely must feel sad about watching that money going out, knowing you'll never see it again.

In the stock market, you have to quickly admit when you're plain wrong. If you can't do that, investing could become an expensive hobby for you. In growth investing, throwing good money after bad is never a good strategy.

Still, you must have heard this idea a hundred times from a hundred different people: If you buy a stock and it goes down, buy more. As you buy it cheaper, your average cost declines.

When the stock finally turns around and rises, you have more shares at a lower price than would have been the case if you had just frozen up and held your original position.

So what's wrong with this approach? Everything.

First of all, you're buying a stock that's falling. Wouldn't you rather be buying a rising star? Isn't that why you've been screening for that handful of potential winners?

Second, by averaging down, you'll end up with more shares of a loser than you had originally planned. Your portfolio could become dominated by bad stocks.

Perhaps worst of all, you'd be inviting disaster. And in the stock market, such invitations may well be answered.

The big assumption in averaging down is that the stock will, at some point, turn around. What if it doesn't? Your portfolio will be decimated, and you'll rue the day you ever started trading stocks.

To win in growth investing, add positions in stocks that are rising soon after their breakout. That's how a true leader acts. Averaging up in a rising stock gives you a chance to compound your gains.

Do some stocks never recover? Of course. Others may stay near their lows for years. Citigroup (C) topped out at 57 about four years ago 1. It had been a market leader and as solid a Wall Street name as it gets.

You know what happened. The stock crashed to 97 cents in March 2009 and is now wallowing just shy of $5. Do you still have shares of Yahoo (YHOO), another household name that peaked at 125.03 11 years ago? Yes, it was a fantastic winner in the past. But new bull markets usually feature new leaders.

In these and countless other examples, you'd do infinitely better to cut your loss to no worse than 8% from your buy price. If the stock turns around, you can get back in. If it doesn't, you'll have a far healthier portfolio and you'll still be able to sleep at night.

http://education.investors.com/investors-corner/563054-psych-106-never-average-down-in-a-losing-stock.htm

The entire IBD series: Hope, Fear And Greed: Psychological Barriers To Successful Investing:
http://news.investors.com/special-report/562114-hope-fear-and-greed-psychological-barriers-to-successful-investing.aspx

Buying shares at $.0001 to average down with the goal of selling at $.0001 does not make sense and only increases your exposure to losses. It's putting good money after bad money.

PVEC could do a reverse split and continue to dilute which would cause the split-adjusted price to continue to drop.

PVEC could also end up with a DTC chill or, even worse, regulatory action such as an SEC suspension and relegation to the grey market. Both of these actions cause a stock to become much more illiquid. If you increased your number of shares to average down, you may not be able to sell all of them.

Cutting losses and putting new investment money into rising stocks is what wise investors and traders do.