Monday, August 27, 2007

Gateway, Crox and the Perils of Averaging Down.

I heard the news this morning regarding Acer's purchase of Gateway and I just couldn't resist. I am not trying to rub salt in the wounds of Gateway investors (there's that word again). I just thought that if a picture is worth a thousand words then this one has got to be worth at least that if not more. Do you think Pompom television (CNBC) will show you this chart ! NO ! They will tell you that Gateway(GTW) is up $0.60 to a 1.80 up a whopping 50%. Do you not love selective, tout reporting. Just like they are doing to Cisco right now. What is the lesson to be learned here from the 97.8% decline? Was it that maybe the dips were not actually buying opportunities but warnings screaming sell? Or maybe that things really were NOT different this time. Or possible that the analysts had absolutely no clue as to what was going on?

Please look at this chart of Gateway the next time some analyst is on TV touting the latest hot fad like beanie babies, hoola hoops or Crocs. (speaking of which see chart top). The minute things go south they will re-iterate their buy ratings, maintain that this is buying opportunity, blah, blah, blah only to abandon you in the end, leaving YOU holding the bag. The chart above clearly shows the perils of AVERAGING DOWN. Ask the many Gateway holders who averaged down how they feel now about this strategy even with this glorious buyout from Acer. I will repeat here again, losers average their losers. Don't fall into the myth perpetuated by sales and commission driven Wall Street, averaging down is a guaranteed ticket to the poor house. I cannot say it any clearer than that. To the doubters out there of which there are many, I suggested reading up on Nick Leeson from Barings fame for empirical evidence on this issue. Good trading to you all.


david said...

Your comments on averaging down are misleading. Of course averaging down with no concern for the technical or fundamental health of a company makes no sense. But lets assume you felt good about the fundamental strength of Gateway before the crash, and now feel strongly about CROX going foward. You would have PLENTY of MAJOR warning signs prior to a 97% loss. A high volume breakdown below the 50dma or the 200dma for that matter. People who continue to average down in such circumstances need to step to the sidelines and read up on stock investing. But on the other hand there are plenty of times when averaging down is very beneficial. The last correction for CROX to 44 a couple weeks ago is a good example. While the indexes were brutally tanking on high volume CROX seemed to be tanking too, losing 25% of its worth. However, if you look closer it corrected on diminishing volume (with only 1 day out of 10 with above average volume) and then had a high volume capitulation day at the lower bollinger band. text book healthy correction that invited many opportunities to average down for those who had cash to spare. Of course CROX could someday fall off a cliff (though that seems awfully unlikely in the next 6 months), but if it is going to we will have plenty of opportunities to bail and plenty of signs that averaging down isn't such a good idea. When the 200dma became resistance for Gateway (in early 2005) rather than support that was certainly a time to be seriously reevaluating one's position.

Harleydog said...

you make some excellent points, but I have seen far too many disasters occur from averaging down, whether it be Nick Leeson, Long-Term capital or the Japanese copper trader(some of the more notible ones)to employ the tactic under any circumstances. I prefer to average up, using the pemise that I don't advance until I am sure I won't have to retreat. I appreciate your comments on thx for reading.