Why averaging up is better than averaging down?

We are in the midst of financial turmoil, again. I can appreciate the "turmoil" better now as I am relatively wealthier than I was 10 years back. Many has started to pop me with this question: "Is this the right time to buy shares? When can we buy ?"
There is no best answer to this. Even if Warren Buffet tells you to be greedy when everyone else is fearful, you got to have "bullets"(money) to be greedy! However, I would like to share my thoughts on averaging.
Many have told me that they have started to "average down" following the turmoil. These includes averaging down their trust funds, stock holdings or even bonds. For financial idiots, averaging down means buying the same equity/trust/shares at a lower price compared to the price you have bought previously to lower down your average purchase price for all units held, vice versa for averaging up. Why I prefer to average up instead of down?

1. The Percentage Trick
If you have bought ABC share at RM 1 each last month and now the price has fallen to RM 0.50, you loss 50 % of your share's value in your investment. Think about this, if you were to break even again, you need the share to gain a 100% increase. In order to make a same amount of RM0.50 gain , you need the share price to perform 200 % gain for the share to move from RM0.50 to RM1.50. Which do you think is harder ? To move down from RM 1 to RM 0.50 or to move up from RM 0.50 to RM 1? Mind you that we are talking about the same value of 50 cents here with a different gearing ratio.

2. Bull and Bear sequence
Strong bull does not visit share market often, so does the bear. If you notice, our market is stagnant most of the time, with less than 15% variance over 3-6 months. A stable market is always the best time to make good decisions. Stable market normally occurs after a great bear market. You can take your own sweet time to average up.

3. Catching a Falling Knife
Have you experienced that before ? Have you ever averaged down, causing your portfolio to stay in red for a very long time? This statement is very true, you will bleed. I have a friend who recently told me about the hidden potential of IOI group, as their stock price have fallen from RM 8.60 to RM 4. I have advised him to put that purchase on hold. IOI shares has since fallen from RM4 to RM2 now in just 2-3 weeks. During a turmoil, you will finally find out all the risk that a company is exposed to.

4. 真金不怕红炉火- Genuine Gold is able to endure the fire
During the good times, everyone is concerned about share price gain rather than dividend yield. Who cares how much dividend you make as long as the company is making big money and share price is up exponentially. Most of the time, investors are not told about the investment risk a company is exposed to and the debts-translated-benefits during the good times. All these will gradually surface during a crisis as companies are desperate to keep their books looking good. Unfortunate incidents on risk exposure(such as Enron, IOICORP) will less likely to happen when the market is picking up.

So, when the market is bottoming out? Or, would it be better to say, when the market is picking up again? My personal gauge, when the market is moving up 15 % again over a period of 3-6 months, it would be a good time for averaging up. It's always better to be safe than sorry, don't you think so?

Million Colours of Malaysia. Why talents leave?

I feel somehow lucky, to be a Malaysian, after watching the video below.
Malaysia, a great place, and will be greater if we manage to retain all the talents.
The song is performed by a talented Malaysian as well, Juwita Suwito, listen to her songs here.
Are you a Malaysian residing outside Malaysia now? I hope to share about talent in my next entry. Let's hope for a better Malaysia tomorrow!