Dec 11, 2021

Cory Diary : Averaging Up Buffer

The Lesson

Have been interested in a particular stock but kind of late in the game. The first thing I do is to throw in an initial position. Get my skin in it. For the size can be throw of dice as long is not too big. I did it into with too big an initial position and unfortunately the Tech market corrected in early 2021. The size was about double of roughly my average trading size. Well, I was in FOMO. Wanted to scale up quickly. Maybe just Bad timing. During the course learned a lot of Averaging Down. Not a very shiok time to invest. haha. About monthly. Sometimes I reduce my size and traded twice. Trading Fee not my primary consideration but trying to build a position safely and having the conviction that long term the stock price will come back up and there will be a flip in profitability. In that sense, the stock must be something I have strong believe in.

Averaging Up

Now after more than 6 months, the stock broke new high. Position size wise is still not to the level I wanted. Need it to be doubled at least to feel the impact to the portfolio. In fact, feel so good with the way the company is going. Maybe tripled. And this present an issue on how to Scale Up safely. We want to avoid a situation where the market correct after backloading at high prices which negate all the profits and effort of past 6 months.

For example Tesla Stock. Use chart to see where is the bad case situation. Say $900. Do an estimate average cost after profit around 800. Currently trading slightly above $1000 which likely due to Elon Musk selling his shares before Option Expiry else it would have been much higher imo. Compute my average cost after deducting profit from my purchase price. I can use $100 gap. Therefore if is below $800 cost price, i can continue to buy some shares to average up. Once it hits 800, I stop and wait for stock price to hit the next higher level. In this way I created a buffer of ensuring profitability or MOS. Depending on individual we can increase the buffer and this will reduce my averaging up possibility. Why we do this is for emotional and depth of conviction reasons. Another is we want to avoid a situation where a good profitable position turns negative due to averaging up which can be quite painful.

The Mentality of Celebrating Others Success

Now, we can look from another view point on conviction. Say our average cos is $800 again. A new investor wanted to wait after Elon sells finish before he adds. He simulate a scenario of not to wait and add at $1100 ? That's 37.5% more than an investor who enters at $800. He has a mental block that he do not want to lose out to those who bought cheaper and decided to wait. Let's say the expectation on both investors are $3000 in 3 years. And each bought with US$10k at $800 and $1100 respectively.

What's the profit for the investor with $800 base cost ? 12.5 Tesla shares will be a profit of $27.5k. How about the investor with $1100 base cost ? 9.09 Tesla Shares will be a profit of $17,271. He can also wait for $1000 before enter and the profit will be $20k. Which is not significantly far behind from an investor with $800 base cost. What he has to get over is the kiasu mentality vs the potential of Tesla Car driven away autonomously. In investment, is not to beat the other investor but to beat oneself. Don't lose sight of it. There is always an investor who pay a much lower cost than us. The only difference is whether you know him personally or not.


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