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Thursday, October 23, 2008 10:50:32 PM
In order to average down an investor needs to keep buying shares as the pps falls. Clearly as the pps continues to fall each purchase along the way has a built in loss that accompanies it. Obviously if the same amount of money spent on buying shares during the fall in price were held until the pps had bottomed it would purchase a significantly higher number of shares.
The other, and much more important weakness in averaging down is the necessary assumption that the price will ever go back up. The phrase never try to catch a falling knife is quite appropriate. Chasing the price down is a fools game especially with a stock that has never had a rising pps but has only ever fallen.
The much more robust and sensible strategy is to hold your cash and wait for the stock to actually rise. Your money remains safely in your pocket and you miss no opportunities. All you have to do is buy in as the stock climbs and you obtain maximum benefit.
Any stock that is dumping shares to pay the bills can have only one direction, the laws of supply and demand automatically dilute the value of each share as each new share is added to the OS. When a company has no other revenue source than the printing and dumping of shares, the pps has only one direction available to it. To 'average down' under such conditions is tantamount to setting your money on fire. LOL
regards,
frog
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