When should you buy more shares?

Apologies for the missing photos and missing post the past week as I have just came back from a holiday in Thailand

As you would have seen the increasing amount of articles on how Singapore’s stocks prices are dropping like grapes… it leaves us to two questions

1.SHOULD WE SELL OUR POSITIONS?

This question allows you to reflect on your understanding of your stock holdings (Why you purchase it initially?). Ideally (If you did not buy it through a “gambling” methodology), we will be seeking to learn more about the company and finally, having a strong financial justification on whether we should hold/sell our position.

2.SHOULD WE BE MORE VESTED INTO OUR POSITIONS?

Majority of the time after the first question is answered with a “Hold”, we would be thinking of buying more instead of holding…. is that really a right thing??….. Do we really know whether if the price of the shares will go further down? or will it actually go back up?

Some might say that this is a millionaire question

What we all need to really understand is the law of large numbers [after understanding diversification of assets]. The law of large numbers is a principle of probability according to the frequencies of events with the same likelihood.

To understand more about the law of large numbers – Click here & Here

How then should we go about utilising this knowledge? – The only thing we have to do is to increasing our winning probability, but in order to improve we first have to have a “sample” of our methodology.

What does that mean?  – it means taking record of historical trades and to average out the number of winners against the losers. After this step, you will then have a probability that tells you how “good” your methodology is.

Some pointers to note is that :

Your winners might be lesser than your losers but you can be still be profitable. This can be due to your exit strategy on your investment.

To clarify this point : you purchase the stock at $1 and have a wining exit strategy at 52 weeks high of $5, which gives you a profit of $4 and a losing exit strategy at 10 weeks low of $0.80, which gives you a loss of 20 cents.

In a “down turn” we might fall into the gambler’s fallacy where we over invest and in a “up turn” where we might over purchase (Assets being overexposed). I’ll end this post with an example of how powerful law of large number is.

John currently holds 1,000 units of smelly banana stocks ( purchased at $1.50) and he currently have $5,000 worth of cash. As stock price of smelly banana dropped to $1, he felt the intense pressured (gambler’s fallacy) where illogical justification of ” this is the best stock / time to risk it all / this stock has all the potential ” he decided to purchase $5,000 worth of shares (all his money). He ended up losing all his money (very clinche ending). [ Assuming smelly banana is a stable company ]

What if he knew about the law of large numbers? – John has kept a record of his past investment and a has strong understanding of his winning probability (60%) and the power of asset diversification. He would find 5 similar priced and strong company as smelly banana. This would give him 5 independent chances of winning each at 60%. Additionally, to top that he has a winning and losing exit strategy of $4 profit and 20 cent loss…. he would soon be a millionaire wouldn’t he???

I honestly don’t know where my china photos have went to…. but here are some photos of Thailand I recently went.

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One thought on “When should you buy more shares?

  1. Pingback: How much stocks should I buy? |

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