Buying: Leave Room to Average Down

The single most crucial factor in trading is developing the appropriate reaction to price fluctuations.

Investors must learn to resist 

• fear, the tendency to panic when prices are falling, and 
• greed, the tendency to become overly enthusiastic when prices are rising. 

One half of trading involves learning how to buy. 

• In my view, investors should usually refrain from purchasing a "full position" (the maximum dollar commitment they intend to make) in a given security all at once. Those who fail to heed this advice may be compelled to watch a subsequent price decline helplessly, with no buying power in reserve. 
• Buying a partial position leaves reserves that permit investors to "average down," lowering their average cost per share, if prices decline. 

Evaluating your own willingness to average down can help you distinguish prospective investments from speculations. 

• If the security you are considering is truly a good investment, not a speculation, you would certainly want to own more at lower prices. 
• If, prior to purchase, you realize that you are unwilling to average down, then you probably should not make the purchase in the first place. 

Potential investments in companies that are

• poorly managed, 
• highly leveraged, 
• in unattractive businesses, or 
• beyond understanding 

may be identified and rejected.