Friday, February 27, 2009

Doubling Down

I can't count the number of times I've heard an investor say, "I bought some at 30, its down to 20 so I will buy more." In trading, that's simply dumb(er). Just because you were wrong at 30 doesn't automatically make you right at 20. Never double down.
I wish the term, "average down" were banned from investment speak.

Well we're about to do it on a scale unseen before. Let me repeat. You never ever add to a losing position. Not so long ago, Hank Paulson, on behalf of the American taxpayer bought a 7.8% stake in Citigroup for $$25 billion dollars. Then he guaranteed 90% of future losses on $301 billion in assets. Then he tossed in another $20 billion just to sweeten the pot. For that princely sum, we bought 7.8% of a company worth $50 billion. For 100% of the value of Citigroup, plus guarantees worth 500% of the value of the company we received 1/10th of a company worth 1/5 of our investment. Pretty clever eh? Our $45 billion is now worth slightly more than $1 billion.

And now we are going to convert our preferred shares to common? Are you on crack?!

In the words of Oliver Twist, "Please Sir, may I have some more?"