John Hempton has a very interesting post on when to average down into a stock.
As a summary, one should not average down into a stock if
- a company has a lot of financial leverage
- a company has significant operating leverage
- the company is in danger of becoming obsolete
I think this is already a pretty good advice, as a counter example he gives Coca Cola where one can average down “without much risk”. As this is a very interesting topic, I wanted to contribute my 5 cents to this:
Behavioural biases at work
In my experience, averaging down is often motivated by a couple of behavioural biases.
The major bias which “helps” investors and especially professional ones to average down in the wrong cases is in my experience the “over confidence” bias.
Camellia Plc is a pretty odd company for UK standards. It is a conglomerate with interest in plantations around the world, as well as some engineering businesses, a UK cold storage business, a fish trader in the Netherlands and a private bank plus an art collection, a stock portfolio and other stuff.
Some UK blogs have covered Camellia like Richard Beddard and Expecting Value.
Camellia seems to be a favourite among deep value or “assets at a discount” investors and as I do like strange companies (and conglomerates) , I decided to take a deeper look at it. Also as it is in the same sector as ACOMO makes it easier to get “into it”.
Already some days ago, I linked to an interesting write up from Wertart on UK retailer SportsDirect.
In general, I liked a lot of things at SportsDirect from a share holder perspective:
+ It is kind of “Owner operated” with an experienced management
+ Aldi/Lidl like business model (Some brands, own brands, “hard discount”)
+ good growth track record since IPO
+ very good profitability
+ looks cheap based on past performance
Of course there are a couple of issues as well:
- it is retail after all
- Brexit / GBP issues (higher import prices, potential issues with consumer confidence)
- Bad PR (low wages, zero hour contracts, incidents)
- some governance issues (related party dealings etc.)