Averaging Down: A Sure Shot Strategy for Losses in Stock Market | What is the Right Way?

Summary

The video from 5 Minute Finance by ET Money delves into the risky strategy of 'averaging down' in stock investments, illustrated by the downfall of Yes Bank's shares. It warns investors of the potential for massive losses when continuing to buy into a declining stock, highlighting the sunk cost fallacy. Instead, it suggests 'averaging up' with growth stocks, using the success story of Varun Beverages as an example, to underscore the importance of strategic investment decisions in the market.

Takeaways

• 📉 Yes Bank's stock price plummeted by 41% between 27th August 2018 and 21st September 2018, and by over 85% within a year.
• 📈 Despite the crash, Zerodha and Upstox saw a significant increase in unique investors in Yes Bank stock, with numbers more than doubling and eventually reaching almost 2 lakh.
• 💡 Investors were engaging in 'averaging down', buying more shares as the price dropped to reduce their average purchase price, hoping to minimize losses.
• ⚠️ Averaging down can be risky as one bad trade can wipe out previous earnings, as illustrated by the Yes Bank example.
• 🤔 The script questions why investors would invest more in a falling stock, highlighting the potential pitfalls of this strategy.
• 📚 Averaging down is an investment strategy where you buy more shares of a company as the price drops, to reduce the average purchase price.
• 🔍 The script discusses the 'sunk cost fallacy', where investors continue to invest in a failing stock, hoping to recoup losses, which can lead to further losses.
• 📉 The dangers of averaging down are emphasized, with the potential to wipe out years of gains from the stock market.
• 💰 An alternative approach is presented: 'averaging up' on growth stocks, which are expected to increase in value faster than their peers.
• 🚀 Averaging up on growth stocks can potentially lead to owning a multibagger stock, but identifying such stocks is challenging.
• 🌟 The success story of Varun Beverages is highlighted, showing how their stock price rose significantly, and how averaging up could have been beneficial.

Q & A

What happened to Yes Bank's stock price between 27th August 2018 and 21st September 2018?

Yes Bank's shares slipped by 41% during this time period.

How did the number of unique investors in Yes Bank stock on Zerodha and Upstox's platform change during the same period?

The number of unique investors more than doubled from 23,681 to 58,559 on Zerodha and Upstox's platform.

By 22nd August 2019, what was the percentage decline in Yes Bank's stock price from the previous year?

Yes Bank's stock price had crashed by over 85% in one year.

Why did investors continue to invest in Yes Bank's falling stock?

Investors were trying to average down, hoping to reduce their average purchase price and potentially recover losses if the stock price rebounded.

What is the concept of averaging down in investing?

Averaging down is an investing strategy where you buy more shares of a company as its stock price drops, aiming to reduce the average purchase price of the stocks in your portfolio.

Why can averaging down be dangerous for investors?

Averaging down can be dangerous because if the stock continues to fall, it can compound losses and wipe out previous earnings, as seen with Yes Bank's stock.

What is the Sunk Cost Fallacy and how does it relate to averaging down?

The Sunk Cost Fallacy is the tendency to continue investing in a failing project or stock in an attempt to recoup losses, which can lead to further losses instead of cutting losses early.

What is the difference between averaging down and averaging up in stock investing?

Averaging down involves buying more of a falling stock to lower the average purchase price, while averaging up refers to buying more of a growing stock to capitalize on its potential for further growth.

Why might an experienced investor consider averaging up on growth stocks?

An experienced investor might average up on growth stocks because they have the potential to increase in value faster than their peers, offering the chance to own a potential multibagger stock.

What is an example of a growth stock that has significantly increased in value over time?

Varun Beverages, a franchise of PepsiCo in India, is an example of a growth stock that has risen in value, increasing more than 12 times from 140 Rupees to 1,674 Rupees in five years.

What is the final advice given in the video regarding investing in falling stocks?

The video advises that the right strategy is to cut down losses as soon as they breach your comfort level or your appetite to stomach the losses, rather than continuing to invest in a falling stock.