RE: Upward Trend12 Jan 2016 20:14
Good evening moosh. I agree bottom fishing can be dangerous, especially as some of these AIM shares have a tendency to keep on dropping just when one thinks the bottom must have been reached, or even main shares like PMO. Very irritating. But to keep adding or averaging down is imo the wrong thing to do as one is only investing more than one originally intended into what could turn out to be a black hole eg MTV, FITB.
An alternative was introduced to me by a very successful colleague.
e.g buy £1k worth of shares at 20p a share, 5000 shares, with stop loss set at say 20%. Price drops back to 16p so shares sold and a loss of £200 is crystalised. Price continues to fall and fall until it steadies at 5p so one invests the £800, 16,000 shares bought because one believes in the share. However after a small rise to 5.2p it falls again and one crystalises a further 20 %loss of £160 leaving one with £640. Price continues to fall to 1p. At this stage despite the massive drop in price the old CEO departs new board come in and yes one still has belief in the share and one goes back in with the remaining £640 buying 64000 shares. Low and behold Investor sentiment likes the new board/contract/mou call it what you like and price doubles to 2p. One is now sitting on shares worth £1,280 so one says b ugger that I'm out with a £260 profit, or one holds on and it rebounds to 20p.making a very handsome profit of £11,800. If one had held on and not crystalised losses one would still have 5000 shares worth 1K and no profit. If one had averaged down the original investment still in tact and yes the top ups would have profits but it meant further funds being tied up in the share more than originally intended and which could have been used on other opportunities. At least with the crystalizing of losses and reinvestment of net proceeds ensures only the original commitment may be lost. Dealing costs and spreads ignored for illustration purposes to show the principle involved. What do you think?
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