Having learned the ropes from the best in the business, I’ve been admonishing readers not to chase stocks for 16 years. But there’s clearly a case for putting money wherever the best returns are. So readers often ask if it ever makes sense to “average up,” and if so, when?
First, let’s make the distinction clear. Averaging up is not chasing stocks.
My definition of chasing a stock is succumbing to FOMO and paying more—when the company has not changed or added any value—just because share prices are rising.
Averaging up is putting more money where money is being rewarded.
Different as night and day.
Or… maybe not always.
A stock we own can go up because the company has made a great discovery, built a mine, acquired an undervalued asset, doubled output, or any number of valid reasons. It doesn’t fit my definition of stock-chasing if the company has actually added value.
But a stock can also go up for no good reason at all. If we’re averaging up in response to FOMO and not added value, that’s more like chasing a stock than making a rational investment decision.
So, when does it make sense to average up?
Averaging up makes sense when a company is adding enough value to make for a more compelling value proposition than available alternatives, even at the new higher price.
The part about being more compelling than available alternatives is key.
I wouldn’t want to average up because a stock has rewarded me. I want to do it because I have good reason to think it will reward me.
And I certainly wouldn’t want previous favorable results to make me decide based on positive emotions rather than analysis.
Whenever I make an investment, I look at all the opportunities I see—old and new alike. I want to deploy my cash where I see the most reward for the least amount of risk.
If that happens to be in a stock I already own at a lower cost basis, fine.
But that stock must still compete with new opportunities and win on its current merits, not past performance.
That’s my take,
P.S. To be kept abreast of more issues, opportunities, and dangers affecting investors, please sign up for our free, no-spam, weekly Speculator’s Digest.
