Saturday, 5 August 2017

Average down plan

Recently, Raffles Medical Group tumbled around 8% after it announced its 2017 Q2 results. As I still believe in its long term story, I did not sell the shares and was contemplating on averaging down. 

The questions are at what price? And buy how much?

After some thinking, I decided that for the growth stocks in my core holdings, I will adopt the following plan to accumulate more when there is a sell down. 

Firstly, will look at the business and financial and decide if there is any major change in its fundamentals. If there is deterioration in its fundamentals which increases in uncertainty and risk in holding on to the shares, I would have to decide if I need to cut loss. 

On the other hand, if fundamentals still hold strong, I will accumulate. I will average down when the price dropped by 20% from my average purchased price. Each time, I will add 20% of the original share count. Within the next 6 months (2 reporting quarters) of the first averaging down, I will continue to average down when price dropped by 20% of the last purchased price. After which the cycle will be reset.

I have 10000 shares of ABC company at $1.000. If the price dropped to $0.80, I would add 2000 shares. With that, I would have 12000 shares at $0.97.

Within the next 6 month, I would only continue to average down if the price hit $0.64 ($0.80 x 0.8). If it does, then I would add 2400 shares at $0.64 ($0.80 x 0.8). With that, I would possess 14400 shares at $0.91. 

On the other hand, if the price has not dropped to $0.64 within the six months of the first average down, my next average down would be 2400 shares at $0.77. ($0.97 x 0.8). With that, I would possess 14400 at $0.93.

The plan provides a guide on how I will response when the price of my counter drop. I believe with this guide, it takes part of the emotion in my decision and hopefully it will turn out to be good. Having say that, I will not following the guide religiously. I am sure there will be occasions which require me to be more flexible.

I have not executed this plan yet on Raffles Medical Group as its price has rebounded last week. I do hope it will drop more in the coming weeks which will allow me to accumulate more shares in this outstanding business.

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