averaging down

Here's a story I came across above averaging down. It's some American guy but still relevant worldwide. Moral of the story - most of the times it doesn't work.
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I always use this case in point. Back in the early 1970s, sugar sold at a buck and a quarter a pound. And everybody was bullish on sugar at a buck and a quarter a pound. Why wouldn’t you be? The world was inflating. Gold was at $1,000. The world was coming to an end. They’re not going to make anymore sugar. Buy sugar! At a buck and a quarter.

So it went to $1.15. People said, “Well the fundamentals haven’t changed. And if just gets back to $1.17, you can break even.” And the fundamentals haven’t changed, so people did. And then it went to a dollar. Well, at a dollar you said, “Well, it was a good buy at a buck and a quarter only 2 months ago, and the fundamentals haven’t changed. And if I just buy it here, if it gets back to $1.10, I’ll break even.” Which was fine until it went to 75 cents.

Well, at 75 cents you said, “Well, the fundamentals haven’t changed…that much. And if I just buy it here, if it goes back to 95 cents, I can break even.” Which was fine till it went to 50 cents. Well, at 50 cents you said to yourself, “Well, the fundamentals are probably changing somewhat.” The big fundamental really has changed - price has. But nobody pays much attention to that when they’re trying to defend a bad position. And you bought some more at 50 cents cause now if it just gets back to 65, I’ll break even. Which was fine until it went to a quarter.

Well, at a quarter you’ve got to buy more, don’t you? Cause it was a buck and a quarter only 18 months ago. And the fundamentals really haven’t changed that much. And if it just gets back to 35 cents, I’ll break even. Which was fine…until it went to a dime.

Well, at a dime you’ve got to buy more, don’t you? It was a buck and a quarter only 24 months ago. And the fundamentals have indeed changed, but if it just gets back to 20 cents, I can break even. Which was fine until it went to a nickel.

Well, at a nickel you’ve got to buy more, don’t you? It was a buck and a quarter only 2 years ago. And the fundamentals, yeah, they’ve changed a lot. But now if it just gets back to 7 cents, I can break even. Which was fine until it went to 2 cents.

And at 2 cents they actually took delivery of sugar on the New York Coffee, Cocoa and Sugar Exchange. Which in those days was delivered in a burlap sack. People cut the burlap sack open, took delivery, dumped the sugar and sold the burlap. Which was fine ... until it went lower.

Now, I like to tell that story, and I especially like to tell it to Canadians. We’re here in New York, but I like to tell that story to Canadians because I tell them, “Take a chart of sugar from the early 1970s, stick it on a wall. Oh, and get a chart of Nortel, stick it on the same wall. Walk 40 feet away. You can’t tell the difference.” And there was value all the way down.

You have no idea how far down can be until down finally stops. Oh, and you know what day it’ll stop? It’s on page 111 of your Paul Samuelson economics textbook. It’s the “puke point.” It’s the level at which you throw up all over your shoes and finally give up. And you will. Buying things that go against you will kill you.