CASE STUDY: Bear Stearns (BSC, Financial) Doubling Down at the table works
On Friday, March 14th, Bear Stearns traded around $30 a share. By Monday the stock had dropped down to $3.00. What if you would have bought it at $30? Well, come Monday morning you might be really frantic... or, you may have recognized the opportunity and bought more! Let's assume you did the latter and Friday you saw the stock drop from $60 - $30 (50%), which in and of itself is a pretty substantial move for a company that came out earlier and said they had plenty of liquidity.
Monday morning, instead of being panicky you buy more at $3.50, but you remember to buy the same dollar amount - $10,000. Now, I am personally a big proponent to this because of the following reasons.
1. It lowers you cost average dramatically. That's why it's important to always have cash in your account, or sell something that isn’t performing right now sometimes!
2. The likelihood there's a bounce is better than not! This could be known as a cigar butt investing in many cases, but the business underneath the draw down has to be a good one.
Let's look at the BSC example:
Friday - 3.14.2008:
$10,000 bought you 330 shares of Bear Stearns (BSC) around $30.
Monday – 3.17.2008:
$10,000 buys you an additional 2,860 shares at $3.50.
So in a matter of 2 days the stock lost 95% of it's value! However, since you bought the stock in increments, placing the same dollar amount behind it each time, you now have a cost average of $6.25 on 3,190 shares. You could have lowered it by really adding heavily to the position down at $3.50, but even if you just put the same amount you are in a good position.
Unfortunately, hindsight is always 20/20, but I have seen this happen all over the market this year and a week after you "doubled down" your $20,000 investment is now worth $35,000 - a nice 80% PROFIT!
Monday – 3.17.2008:
3,190 shares @ $11.00 = $35,090.00
These opportunities are rare, but they do happen and thankfully, we've been in a few this year alone and have taken advantage for our portfolio. Just keep an open eye to the news when they start talking about big drops in businesses that once had a solid footing. Then start doing your homework and act fast!
___________________________________________
Jonathan D. Poland is the Founder & Chairman of the PigsGetRich Investment Network. www.pigsgetrich.com
On Friday, March 14th, Bear Stearns traded around $30 a share. By Monday the stock had dropped down to $3.00. What if you would have bought it at $30? Well, come Monday morning you might be really frantic... or, you may have recognized the opportunity and bought more! Let's assume you did the latter and Friday you saw the stock drop from $60 - $30 (50%), which in and of itself is a pretty substantial move for a company that came out earlier and said they had plenty of liquidity.
Monday morning, instead of being panicky you buy more at $3.50, but you remember to buy the same dollar amount - $10,000. Now, I am personally a big proponent to this because of the following reasons.
1. It lowers you cost average dramatically. That's why it's important to always have cash in your account, or sell something that isn’t performing right now sometimes!
2. The likelihood there's a bounce is better than not! This could be known as a cigar butt investing in many cases, but the business underneath the draw down has to be a good one.
Let's look at the BSC example:
Friday - 3.14.2008:
$10,000 bought you 330 shares of Bear Stearns (BSC) around $30.
Monday – 3.17.2008:
$10,000 buys you an additional 2,860 shares at $3.50.
So in a matter of 2 days the stock lost 95% of it's value! However, since you bought the stock in increments, placing the same dollar amount behind it each time, you now have a cost average of $6.25 on 3,190 shares. You could have lowered it by really adding heavily to the position down at $3.50, but even if you just put the same amount you are in a good position.
Unfortunately, hindsight is always 20/20, but I have seen this happen all over the market this year and a week after you "doubled down" your $20,000 investment is now worth $35,000 - a nice 80% PROFIT!
Monday – 3.17.2008:
3,190 shares @ $11.00 = $35,090.00
These opportunities are rare, but they do happen and thankfully, we've been in a few this year alone and have taken advantage for our portfolio. Just keep an open eye to the news when they start talking about big drops in businesses that once had a solid footing. Then start doing your homework and act fast!
___________________________________________
Jonathan D. Poland is the Founder & Chairman of the PigsGetRich Investment Network. www.pigsgetrich.com
