Averaging Down

Averaging down means purchasing additional shares of an investment after its price has fallen, which lowers your average cost per share. If you bought 100 shares at $50 and the price drops to $30, buying another 100 shares brings your average cost to $40 — closer to the current price, so a smaller recovery is needed to break even.

The Math:

• Initial purchase: 100 shares × $50 = $5,000 (avg cost: $50/share)
• After price drops to $30: current value = $3,000 (down 40%)
• Buy 100 more shares: 100 × $30 = $3,000
• New position: 200 shares, total cost $8,000, average cost = $40/share
• Now you only need a 33% recovery (from $30 to $40) instead of 67% (from $30 to $50)

When Averaging Down Makes Sense:

• The price decline is due to temporary market conditions, not company fundamentals
• You've done fresh analysis confirming the long-term thesis remains intact
• You're buying an index fund or diversified ETF (the "market" will always recover)
• The position is already a small part of your portfolio

When Averaging Down Is Dangerous (Falling Knife):

• The price drop reflects genuine deterioration in the business
• You're averaging down on a single stock without re-analyzing the fundamentals
• You're "doubling down" on a bad thesis to avoid admitting a mistake
• The company has accounting fraud, regulatory issues, or structural industry decline

Value Investors vs. Momentum Investors: Value investors (like Warren Buffett) view price drops as opportunities to buy more of a business they believe in at a better price. Momentum traders see declining prices as a signal to exit, not buy more. Neither approach is universally right — context determines which is appropriate.