Averaging Down Bull's Rebuttal
by Rick Munarriz ([email protected])

Debacles are like a box of chocolates, sometimes you have to squish them to know what you're going to get. David has posed some pretty skanky stock confections. These are the coconut-boysenberry nougat-filled ones that get passed over and are eventually discarded. He never did get around to telling you about Citrix <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CTXS)") else Response.Write("(Nasdaq: CTXS)") end if %>, which last year lost half its value only to double over and over and over again. He looked the other way in regard to CMG Information <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CMGI)") else Response.Write("(Nasdaq: CMGI)") end if %>, which tanked two years ago only to become a ten-bagger. Ahh, caramel macadamia.

Inertia is stock market fiction. Dogs get bathed. Darlings get fleas. To say that a company trading at 20 times earnings is a better value a month later when it doubles and is trading at 40 times earnings is logically weak-kneed. Nobody shops that way at the mall. I can't fathom a storehopper waiting for something to be bid up before buying. However, I can imagine someone waiting until a desired item gets marked down. Now, there's a reason why some items go on sale. The clearance rack can be spooky. But each garment, each stock, must be valued relative to its present price and fundamentals, not just the temporary ebb and flow of fashion.

David brings up the cockroach theory -- I say due diligence at a time of equity peril can be as potent as a can of Raid. The perception that more critters abound is why beaten down stocks are often such compelling values. Pessimism is priced in, just as nirvana is discounted on the highfliers. You can laugh at the guy at the beach with the metal detector, scouring the coastline for gold -- but his chances of walking away with precious metal is certainly better than that guy touring Fort Knox.

Ultimately I just can't subscribe to David's implied notion that we have a stock market that is under-efficient in punishing falling stocks and in rewarding rising ones. I imagine that the ultimate anti-average-downer limits buys to just those gracing the New Highs list. After all, anything else would be averaging down on at least somebody else's investment at the peak, right? It kinda makes your head spin, no?

So, bring on them windmills. Sometimes a falling steak knife is really just a blunt butter knife. Sometimes a dead cat bounce is life 2 of 9. Not every time now. Some of the time. But it is that same selective nature that one is supposedly honing in buying stocks in the first place. Don't waste that talent chasing rainbows exclusively. Buying a quality company low is good, but if the opportunity ever arises, buying lower can be even better.

Next: The Bear Responds