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Averaging down is tricky. Back in '95 I did a trade on Japan. It was late spring, and Congress was talking its usual nonsense about "Asian competitiveness being un-American", or whatever, and it was threatening a trade-war with Japan. But it had to be assumed that kind of talk was just saber rattling. Japan was too important a trading partner (and the US's chief lender), and a trade-war would just beggar both sides. So the investing/trading bet had to be that both sides were bluffing, and the way to make money was to call their bluff by going long.

The Nikkei was plunging, and I started buying. It plunged more, and that scared me. So I reassessed. But the situation still motivated doing the trade, so I added. I added four times as the situation dragged on, not getting resolved. Two days after my last add, at what I considered a judiciously allocation to one bet, on roughly June 23 the Nikei reversed, and I knew I was golden. Because I had done the trades through a mutual fund, I had a mandatory, 90-day holding period. Not problem. I was in the money on the trade and riding the prices up.

Now it's getting to be late July, maybe mid-August, and Barrons runs a big article, "Is It Now Time to Get Back into Japan?" I laughed.

"Hey, guys. Where were you in May and June when the buying should have been done?"

But I also knew I was now more golden than before. I now had institutional money coming into the market I could sell to. That's exactly what I did. As each position hit its 90 days, I unwound it and by early September I was out of everything with double my money. Sweet, sweet trade. The ant got in before the elephants, and he got out before them, too.

With bonds, that kind of a trading is hard to do, not that I don’t keep trying. LOL. But reviewing my score (for how many times averaging down has worked versus how many times it has failed) would be a good project for tomorrow. My suspicion is that its efficacy is a coin-toss, or slightly worse. But we always remember best the times when averaging down worked, which is why never doing it is a good rule of thumb.

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