When an investor decides to buy shares of a company and takes a small position. He waits for the price to either rise or fall before making his next purchase.
If the price falls by 10%, he gladly buys more.
But if the price rises by 10% after his initial purchase – the same investor is now reluctant to buy more shares.
The investor’s mind is programmed to work this way over several years of bargain shopping.
You visit a nearby clothing store and find a shirt you like for ₹ 1500. You postpone your purchase to your next salary date. A few days later you visit the shop again, only to find the same shirt now at ₹ 1750.
Will you buy the shirt? The new price will make you reluctant. Why pay ₹ 250 more for the same shirt which had a price tag of ₹ 1500 just a few days ago?
But what if you visit the same store a year later and find the shirt for ₹ 1750? You are now more willing to accept the price of 1750.
This happens in the stock market too. When the price of a stock suddenly rises by 10%, you are reluctant. But if the price stagnates for a long time after the rise, you are more willing to buy the stock.
But you’ve got to remember – stocks are appreciating assets. They have the potential to rise in value – sometimes exponentially!
A shirt depreciates in value. The moment you buy it, the value is close to nil. The same is the case with mobile phones, cars, televisions – they depreciate in value almost immediately after you purchase them. Hence, it makes sense to bargain hunt here.
That isn’t the case with buying stocks. If you buy the right companies, their stocks can appreciate in value multiple times.
Quality stocks that rise quickly, rarely give another opportunity – especially those stocks that rise towards the end of a bear market and the beginning phases of a bull market.
Conditioning your mind to buy 10 – 20% higher can be far more rewarding in your investing journey than averaging down in your losing stocks.
Do this self study: If ‘Mr X’ averaged Yes Bank from 250 levels (like many retail investors have done) and ‘Mr Y’ slowly accumulated Bajaj Finance as it rose upwards – who would stand to gain today? Who has more peace of mind?
We aren’t even getting to selling here. The ‘Yes Bank’ investor would probably sell and get out, the moment he gets his break-even price. I.e IF he gets his price back. Whereas, the Bajaj Finance investor – who carefully averages up – is always in gains. And he can confidently hold his shares for a long time, as long as the business performs!