I believe in averaging down on my positions when it involves great companies. If a stock I’ve invested money in loses value, but the fundamentals remain the same, then as a long term investor this presents an opportunity to lower my overall cost basis on that stock.
“The process of buying additional shares in a company at lower prices than you originally purchased. This brings the average price you’ve paid for all your shares down.”
Let’s say shares of a company you own goes down in value suddenly. You can do one of three things:
One, you can sell your shares. This would be a good idea if the company is losing market share and losing money year after year. Two, you can sit still and not do anything and as we know Mr. Market can be emotional/unstable on any given day. You don’t have to add any shares or sell them just wait for the share price to balance back out.
Lastly, you can purchase more shares! If the market drops drastically, as it did in the beginning of 2016, most companies go down with it. It’s funny because I remember about four months ago I tried explaining this to my wife. At first she didn’t understand but eventually she got it!
For example Coca-Cola(KO) is sold all over the world and people drink it everyday. I honesty don’t care which way the stock goes as long as they consistently pay that dividend. (Hard to beat facts/50+ years of consecutive dividend raises) There are many reasons a stock may fall in value unfairly, but if it has great cash flow/reasonable debt there is nothing to worry about. So when the stock does fall in value let the party begin!
Live Long & Prosper
Full Disclosure: Long KO