value and opportunity

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.

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