Average Up

Finance, a la shmoop what is average down or dollar cost averaging well remember the

movie Black Hawk Down, Navy SEALs who were shot down in Somalia then bravely [Solider shooting a rifle]

shot their way to safety until they ran out of bullets yeah [Guy looks upset that he's out of ammo]

well that has nothing to do with average down although you'd think it was an [Guy holding popcorn in the theater]

anthem for how we select politicians in this country but we digress when you

average down you thought you were oh so clever in paying eighty two dollars a

share for slip and slide roof shingles sounded like a real winner at the time

well the stock could hit par or a hundred bucks a share and not really par [Guy sliding on some roof tiles in the rain]

but it just sounds cool when equity investors call out par for an equity so

the stock was 100 bucks and you believe the brokers you were sure it'd be [Clock ticking by]

two hundred dollars in two years so you bought and then they missed their next

quarter and then their next you still are a big believer in the stock if you [Girl looking unhappy at the newspaper]

weren't you would take your losses but if you had conviction at eighty two

dollars a share well you still have conviction it'll get to $200 soon right

all right so now the stock sits at 47 bucks a share and you buy another [Stock price chart showing the price going down]

hundred shares to add to the hundred you paid eighty two dollars a share for

seven months ago and then they miss another quarter and you buy another

hundred shares now at the bargain basement price of $35 a share well you

bought in three separate tranches each one cheaper than the next the first one

cost you 100 times eighty two bucks or eighty two hundred dollars, nice job

buying there... second tranche cost you 100 times 47 bucks or 47 hundred dollars [Working being written out]

and applying concepts beyond calculus here the third tranche cost you a

hundred times thirty-five dollars or thirty five hundred dollars well what

did you do you averaged down your initial cost from 82 bucks a share to a final

average cost of 82 hundred plus forty seven hundred plus thirty five hundred

divided by three hundred shares you own which is about 54 sixty-seven a share

your dollar cost average then is $54 sixty-seven cents and you should also

note that although the number one reason to average down is because you're a [Guy sat on a roof]

believer in the stock long term, a second more Machiavellian reason at least if

you're a professional money manager is that it looks a whole lot

better when you report to shareholders that you bought in at a lower average

price when eventually it goes up again so nice going there would be Warren B [Stock price going up again on the chart]

let's hope that SNS shingle starts including an inflatable rescue mattress [Boy sliding down the roof]

with every purchase and every quarter they report [Boy flies off the roof, into a tree and then falls to the floor]