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written by reader Nova-X makes recommendations to invest 50% on a

By backoffice, June 13, 2016

target stock and then another 50% when it drops . They say to enter a lowball offer usually 20% lower. What is the theory behind this and how do you make a lowball offer?

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Travis Johnson, Stock Gumshoe

That’s just placing a limit bid at a specific price that’s good ’til canceled, instead of a bid that’s good for only one day or at market price.

That’s basically just the “average down on dips” strategy, which advocates buying a stock you like in portions — buy a little to start, then add on when you see better prices. I also advocate buying in portions, though generally have had more success in buying in portions when the price is going up because the company’s prospects are improving.

I like to buy stocks that are getting beaten up, and that’s a perfectly rational choice for stocks that you like for a long time horizon and are holding to see how the future works out — that’s a lot of what that newsletter suggests, early stage growth stocks. Those stocks are volatile, and often move up or down rapidly without regard to real fundamental changes in the business. Other folks will tell you that you should never “average down”, and that you should adhere strictly to stop loss trades instead (setting an amount you’re willing to lose, 20 or 25% is common, and selling immediately if it falls that much).
Much of this internal debate (stop loss or average down) depends on how much conviction you have about the long term prospects of the company (and whether you end up being right, of course), and either strategy can certainly work for the right investor. If you don’t have great understanding of a company’s operations, and conviction in the long-term viability of the company, then don’t buy on the dips — on average, stocks that fall tend to keep falling, stocks that rise tend to keep rising, so if you don’t know enough to make a better than average assessment, it’s probably best to listen to what the market is telling you and cut your losses.

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