There are so many concepts about the stock market that are taught in the classrooms, promoted throughout the media, and passed along from generation to generation but, unfortunately, most of them are FLAT OUT WRONG!
I decided to write a 5-part series (this is part 2 of 5) on the common misconceptions that really need to stop being promoted. Keep in mind, these are all my humble opinions, but after 16 years of trading and studying market history, one really begins to notice what works and what doesn’t.
Common Misconception #2 – Dollar Cost Averaging
Paul Tudor Jones is one of the greatest traders in market history. Why? Because he’s consistently profitable. The best “anything” in the world are the best because they perform at a consistent, superior level for long periods of time. Michael Jordan isn’t considered the best basketball player ever because he scored 30 points ONCE in a game. It’s because he averaged 30 points per game over his ENTIRE career.
Jones keeps a sign above his desk that says: “Losers Average Losers.” What he means by this is don’t add to your positions when they are showing you a loss. He goes on to say: “If you have a losing position that is making you uncomfortable, the solution is very simple: Get out, because you can always get back in.”
Unfortunately, many investors are constantly advised to “Dollar Cost Average.” In other words, buy more shares at a lower price to lower your overall average cost. If you are doing this: JUST STOP! Why? Because all you’re doing is being a “loser” and ensuring mediocre results. Essentially, you are putting good money after bad. All it takes is averaging down on one Enron, Bear Stearns, or Worldcom (stocks which at the time were considered “Blue Chips”) to ruin your portfolio and possibly end your trading career. I’d rather listen to a “winner” and cut my losses.