ALEXANDRIA, VA (Nov. 25, 1997) -- Twas the night before Christmas and all through the house, not a ... uh... what? Ah. Sorry. The woman who just gave me my medication tells me it's still only November 25th and Thanksgiving is a few just a few days away. This is good because it means we all have time to help some other, less fortunate folks with a donation to Share Our Strength. As I said on the Iomega board today, it literally takes 30 seconds to grab your credit card, type in the few lines you need to, and send it off. Besides, you'll feel damn good about it afterwards knowing that your cash helped some people who really, really need it. Please give. Thank you.
Okay, I should have put on my asbestos jester cap the other night when I gave my Three Rules to Managing Risk. The three rules were:
2. Never, Ever, Average Down
3. Actually Know What the Company Does
Nobody said a thing about numbers 1 and 3, but a whole lot of people sent me notes asking me why they should never average down. I felt like a shish-ka-bob when all was said and done! So, I stand before you tonight with explanation in hand and steak sauce in tow, just in case you want a Bogey barbeque again :)
People wrote me telling me all sorts of stories about how they made a ton o' cash by averaging down. They also told me that if I worked hard enough and really knew a company's business that it was okay to average down. Let me make several things very clear, that I didn't make clear the other night.
1. The rule to Never Average Down is nothing more than my rule. Take it for what it's worth. The Motley Fool has no official doctrine regarding averaging down, and I can only speak for me.
2. I never said that you couldn't make money averaging down. You absolutely can. You can make money selling lemonade at the corner too, but that isn't really the point :) The focus of the article was managing risk. There is a large difference between making money and managing risk. They're different subjects. Oddly enough, the better you manage your risk, the more likely you are to make money.
3. DRIP Investing does not violate the rule of averaging down because the concept of DRIP is to only re-invest dividends, not new capital. The Drip Portfolio does a combination. It both re-invests the dividends and adds new capital.
Now, to further expand on the concept of not averaging down, the story goes something like this. When you make an initial purchase of a stock, you do so with the belief that you are buying it at the lowest price possible. After all, no sane person would buy a stock at a higher price than they believe they can get at some point in the future, right? So, given that you believe your purchase price to be the lowest possible, what happens if it goes down? (Please keep in mind that I'm not talking about 1/8ths and 1/4s here, but rather a fair percentage drop.) If the stock goes down, you have to admit to yourself that for all the work you did, and for all the research you put in, you were wrong.
Following the logic further, you were wrong for one of two reasons. Either you genuinely misunderstood/misread the business or there is some short-term factor that sent the stock lower. My experience has been (and this is why I have the rule), that people are very reluctant to admit that they were wrong (myself included). They will always deny it somehow and say that the market is making their stock go down, or some other excuse. Because people don't like to admit to their losers, they sit on a stock and say "I'll wait until I break even and then sell it" or worse, "Let me buy some more and lower my cost." What happens so often is that they are throwing good money after bad.
Perhaps my rule should have been "Always Average Up", because I think that's the better practice. I know, though, that so many people are familiar with averaging down, and not that many people consider averaging up. Averaging up would have kept you in stocks like Microsoft, Intel, Dell, etc all the way up. You'd still own them. How many averaged down in Syquest and got killed, just explaining it away as "all that Iomega hype." I hope this helped to explain my thoughts a little more.
End of sermon :)
We interrupt this Fool Portfolio writeup for the following Public Service Announcement. To all of the turkeys that are still alive in the viewing audience:
In Fool Portfolio news (this is the Fool Port, right?), there wasn't much news today. The Fool edged into second place, pushing the Nasdaq into the cellar by a small margin. The S&P 500 still rules though, some 5% points higher. It's gonna be a ferocious battle for the top spot come December 31 and I can't wait to watch the action unfold. Iomega (NYSE: IOM) helped the Fool to a 1.28% gain today. The company announced that the Zip drive will be offered as either a standard or optional item in select lines of the Acer America computers. 3Com (Nasdaq: COMS) received top industry honors for its PalmPilot hand-held computer, which helped move the stock higher by $1 5/16. Other than that, it was pretty quiet around here. We're all just waiting to plop oursleves down with family and friends, slog down a few cases of root beer, and stuff ourselves silly around the Thanksgiving Table. I hope you all have a great and safe holiday.
Gobble, gobble :)
Today's FoolWatch: all the latest in Fooldom.
Day Month Year History FOOL +1.28% -0.79% 23.11% 228.55% S&P: +0.44% 3.96% 28.36% 107.42% NASDAQ: +0.13% -0.29% 23.08% 120.64% Rec'd # Security In At Now Change 5/17/95 980 Iomega Cor 2.52 32.25 1179.76% 8/5/94 355 AmOnline 7.27 72.94 902.87% 10/1/96 42 LucentTech 47.62 80.19 68.40% 8/11/95 125 Chevron 50.28 80.75 60.59% 8/12/96 110 Minn M&M 65.68 97.25 48.07% 8/12/96 130 AT&T 39.58 55.50 40.23% 9/9/97 290 Amazon.com 38.22 50.31 31.63% 8/12/96 280 Gen'l Moto 51.97 60.69 16.77% 4/30/97 -1170 *Trump* 8.47 8.63 -1.84% 8/24/95 130 KLA-Tencor 44.71 40.25 -9.98% 6/26/97 325 Innovex 27.71 23.19 -16.32% 8/13/96 250 3Com Corp. 46.86 34.81 -25.71% Rec'd # Security In At Value Change 5/17/95 980 Iomega Cor 2509.60 31605.00 $29095.40 8/5/94 355 AmOnline 2581.87 25892.81 $23310.94 8/11/95 125 Chevron 6285.61 10093.75 $3808.14 9/9/97 290 Amazon.com 11084.24 14590.63 $3506.39 8/12/96 110 Minn M&M 7224.44 10697.50 $3473.06 8/12/96 280 Gen'l Moto 14552.49 16992.50 $2440.01 8/12/96 130 AT&T 5145.11 7215.00 $2069.89 10/1/96 42 LucentTech 1999.88 3367.88 $1368.00 4/30/97 -1170*Trump* -9908.50 -10091.25 -$182.75 8/24/95 130 KLA-Tencor 5812.49 5232.50 -$579.99 6/26/97 325 Innovex 9005.62 7535.94 -$1469.68 8/13/96 250 3Com Corp. 11714.99 8703.13 -$3011.87 CASH $32438.81 TOTAL $164274.19