Averaging Down Bear's Rebuttal
by David Forrest ([email protected])

All I can say to my esteemed colleague is... "Are you serious?"

I'm going to attempt to wade through all of the fetching dogs and tennis balls and summarize Rick's arguments. I'll also lob grenades at each of his arguments along the way, just for the fun of it!

1. Occasionally, the price of a great stock will "correct" and there's nothing wrong with buying when it drops.

Rick writes: "I would like to think that when quality companies like Intel <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: INTC)") else Response.Write("(Nasdaq: INTC)") end if %> or Motorola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MOT)") else Response.Write("(NYSE: MOT)") end if %> implode, even the most ardent bear will concede that the stock will eventually bounce back."

ACK!!! Just like IBM in 1987, Bethlehem Steel in 1968, and Motorola in late 1995? IBM took more than a decade. I shudder to think of all of the people who averaged the whole way on that puppy. Bethlehem Steel, a loser stock since the late '60s? As for Motorola, it's done nothing for three years while a simple $1000 investment in an index fund would have yielded total returns of over 100%. I could go on and on.

2. If the fundamentals are the same as when you bought the stock, then go for it!

Wow! We agree. IF the fundamentals are the same, go for it. But, as I alluded to in my original argument, all too often what happens is that the stock falls before the bad news gets announced. There's no way for you to know if the fundamentals are the same, not for sure anyway. Actually... I take that back. There is one SURE way to know. Wait for "good" news to come out, let the earnings reports roll in, etc. Assuming the news is good, and the company is the same company you loved, the stock price will rise and you'll be able to average up. This is the best way to be sure.

3. We all average into our portfolios through DRiP plans and our 401(k) plans.

Yep, I covered this, too. Averaging because you can only put away a certain amount at a time is not what we're talking about here. You are restricted in what you can do in the 401(k), so you MUST average, you have no choice. It isn't like you decided that to be your strategy. I'm talking about throwing good money after bad on individual stocks because you're too stubborn to admit you might be wrong. Again, there's one sure way to find out if you're right or wrong... wait. Wait and see.

Finally, I'd be remiss if I didn't harpoon Rick on two of his quotes. He says:

"But when you have a wilted flower, man, oh man, water it! Nurture it. Commit to it -- because when it regains its color and sweet scent, the bloom will be all that much more rewarding. "

Oh baby! Keep pouring water into that sucker. Throw as much water at it as you can. More often then not, when you pour all that water into it, the flower dies. I'd much rather spend my time admiring and smelling the strong flowers that aren't wilting, wouldn't you?

Finally, from our "Dumb Things Warren Buffett Has Said" file, we have:

"I can also call in the great Warren Buffett, who in his 1997 letter to Berkshire Hathaway shareholders said that if an investor is planning to be a net saver over the next five years, he or she should be happy with a falling market."

So, Warren is happier when the market falls then when it rises? Personally, I would prefer that the market doesn't fall at all. I'm a saver for the next thirty years, at least, and I hope this market rises every single year from now until then. To want the market to fall, just so I can buy more at lower prices, is crazy. Sorry Warren, you're a good man, but that is just plain silly.

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