Left With Too Little, When Averaging Down Fails

Includes: BP, COP, CVX, HP, RDS.A, XOM
by: Shelby Cardozo


While reducing risk, averaging down is not without risk.

Sometimes buying too little feels worse than buying too late.

Having enough cash to buy everything you want to buy is key.

Betting against yourself minimizes returns but can add safety.

Bill Gates once said, "Success is a lousy teacher." One of the world's most successful men understands this principle. You learn more from your losses than you learn from your victories, that is, if you're willing to take the time to evaluate your failures. Which brings me to the crux of this article.

At the beginning of the year in "Averaging Down: Up To My Knees In Oil", I discussed my strategy for averaging down into stocks in the energy sector. I felt the article was a great opportunity to highlight some of the purchases I was making and to begin taking positions in tried and true dividend growers.

At the time I prophesied that oil would move towards $40 and that any reset would take place over many months. My plan was to buy energy stocks from the dividend growers' list and average down as oil prices played out. I also highlighted a potential flaw in my strategy.

But of course there are more than few drawbacks to averaging down. Averaging down makes me wait for a price. I run the risk that a position will not get filled completely and I may find myself with three small positions having never purchased a whole position outright. If oil rebounds tomorrow I might end up with small positions in companies I want to own more of.

Small Potatoes

Sitting here today looking at my portfolio and realizing I ended up with too many small positions in the energy sector, I find myself looking at my small potatoes wondering why I didn't pull the trigger and buy whole positions. I have been left with small positions in companies I want to own more of. If my gut and my research was telling me to buy the stocks at the time, why did I only buy partial positions for my portfolio? At the time I didn't purchase a full position out of the fear they would head lower. Unfortunately, the resulting strategy has left my "Late To The Game" retirement portfolio peppered with a lot of partial positions.

% Position % Return
BP 50% +12.84%
COP 25% +4.18%
CVX 100% +1.89%
RDS.A 11% +5.39%
XOM 39% -0.30%
HP 5% +27.11%

The only company I managed to get a full position in was Chevron (NYSE:CVX). Looking at some of the large papers gains by BP (NYSE:BP) and Helmerich & Payne (NYSE:HP) leaves me questioning my strategy.

When Averaging Down Brakes Down

I suspect that having more cash on hand would have helped my strategy. While having a constant influx of cash every pay period was good, I didn't have enough cash on hand to buy as many full positions as I had wanted. I instead was left with picking a few partial positions from a dozen companies I wanted to own.

In a way, when I attempted to average down, I now feel as though I was betting against myself. By not buying whole positions in the companies I wanted to own, at prices I already felt comfortable buying them at, I was in fact placing a bet that I was wrong and that better prices would be available later.

In reality, opportunities came and left quickly in the days and weeks after the article in January. While I had dry powder on hand, it was very quickly used up in little positions as I attempted to average down. Sometimes, when opportunities presented themselves I didn't have enough cash on hand to buy more. Overall, my strategy broke down in this regard.

Make Hay While The Sun Shines

On the positive side, not including dividends, nearly every position is positive. It could be argued that the strategy worked and I got a one full position and several smaller ones at excellent prices. The only thing that prevented me from making those smaller positions larger was the lack of dry powder mountain that so many authors at Seeking Alpha refer to.

So moving forward I think I will be increasing the dry powder portion of the portfolio. Previously I was almost always fully invested. Rather than making a purchase every pay period as I have been, I will let the dry powder build up so that I can make larger purchases in the portfolio.

The hard part will be not letting my itchy trigger finger rub the buy button every time a company is in my sights. Instead I'll be making purchases when I am sure I can acquire a full position if I want to.

Disclosure: The author is long BP, COP, CVX, HP, RDS.A, XOM.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author pays no commissions when he makes purchases. I will be building my cash holdings and taking larger shots at the companies I wish to purchase, rather than making smaller ones in the future. My only hope is I can hold off on the itchy trigger button.