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Value investors by nature do not pull the trigger easily. They search high and low for a low risk entry point. From a risk/reward quadrant, they want to stay in the north-west quadrant as much as possible. It would be common sense to find another stock to invest in while your stock tanks, and I’m sure people have done that, but I also believe it’s because they don’t have any trigger to pull while this is happening! Their watch list may be long, but the entries that allow value investors to feel comfortable about buying a position is a very narrow list.

My mantra is to “sell when it’s right”. One of that test is if you see a better opportunity available elsewhere, by all means you should do so! This is another reason for me not to average down.

As for buying lower being always the right decision, not always… fundamentals may change and your analysis may be different. For example, if you held the stock of a CD player manufacturer, and it cashflows well, low debt, but is undervalued, the value investor may be tempted to buy. However, upon re-evaluation, we realize that management is staunchly against moving to manufacturing MP3 players (I don’t know, just an example), that fact may change your entire analsysis. Value investors as analysts are not infallable. If you realize your initial analysis was way off, you might not want to average down.

Basically, I don’t believe always averaging down is right.. or always not averaging down is right. I don’t believe in staunchly following extreme processes. I’m not an extremist. I believe in being flexible and treating each situation in the best way possible.

However, if a stock is tanking like that, it might be good to get out, move the cash to a better investment that’s going up and then wait and re-buy the stock at it’s bottom. Why continue to take on losses in the hopes that you dollar cost average back to a good place? I’d rather realize I bought too soon, move my cash to a positive position and come back to this position when it’s moving positively.

To me, it’s a very key point that even if you buy a stock at $10 and it stays at $10, you’ve lost money. Not only did you lose 4% or so to inflation, but you lost money due to the opportunity that money had to have made money, even if it was in a CD for 4%.

A few stocks I’ve doubled down on a dip, WWE comes to mind and I made a killing on it, but in the end, to me, it comes down to the size of the dip and the other opportunities around me. I dumped Dell to hop into OPSW. I wasn’t down more than 4% on Dell, however, Opsware was a better investment, so I dumped Dell, moved to Opsware and rode it up $3.75 so far. I can always get Dell back later.