I wish I were a more saavy investor. But I tend to geek on the maths and the gambling nature of it all. I have a couple of stocks that have done very poorly. One is NEPT, Neptune Wellness, that had a reverse 12:1 split. Meaning for every 12 shares I had, I now owned 1.
Being stubborn I have just held on to it for years now. But it got me to thinking:
I wondered how much I would have to buy in order to bring the average price per share down to where the stock would be more relavant. My average prices per share is $19.35 and thanks to their adjustment, I have 2.828571 shares, How about a table?
| Shares Owned | 2.828571 |
| Current Price per share | .7201 |
| Total Market Value | $2.04 |
| Average Price per share held | $19.35 |
| Total Return | -$52.6903 (-96.28%) |
I know! Hence the wondering.
So, I wrote a script to figure out how many stocks to buy to get close to a new desired average price. This is know as Averaging Down.
Stock Average Down Calculator
Note: Enter your current position and a free API key to fetch prices. The tool buys enough at the current price to pull your average down toward the market price, within a small % you control.
To continue on with the example of NEPT, I would need to buy 36.72 shares at $.71 for a total of $26.44 to bring my average price down to $2.05.
This would make my overall holdings of NEPT:
| Total Number of Shares | 39.55 |
| Total Cost of Shares | $81.16 |
| Average Price per share | $2.05 |
It is important to note that the new average price is also the break even price. If the stock reaches that price, I can sell everything and recoup my total investment. Which, is the point of this whole experiment.
Now the question is; Do I think NEPT can to $2.05? No, no, I don’t.
Another Example
Skip bought 100 shares of a company he liked at $50. The stock climbed to $54 within a month and Skip felt like a genius. Then it slid. $47, $43, and it finally went quiet around $40. Skip is down a thousand dollars, and for his shares to break even, the stock has to climb 25% back to $50.
So Skip averages down. He buys 100 more shares at $40. Now he owns 200 shares that cost him $9,000 total, and his average is $45. The stock no longer has to claw back to $50 to make him whole. It has to reach $45, a 12.5% climb instead of 25%. Same stock, same price, half the hill.
But Skip has doubled his bet on a falling stock. If it keeps sinking to $35, the old Skip would be down $1,500. The new Skip is down $2,000.
| action | price | shares | cost | avg | value | +/- |
|---|---|---|---|---|---|---|
| buy 100 | $50.00 | 100 | $5,000 | $50.00 | $5,000 | $0 |
| watch it climb | $54.00 | 100 | $5,000 | $50.00 | $5,400 | +$400 |
| watch it slide | $40.00 | 100 | $5,000 | $50.00 | $4,000 | -$1,000 |
| buy 100 more | $40.00 | 200 | $9,000 | $45.00 | $8,000 | -$1,000 |
Conclusion
So, can you buy your way out of a hole? Sort of. You can buy the hole shallower. Skip cut his climb-out in half, but he paid $4,000 for the shovel, and if the stock keeps falling the hole just gets deeper faster. The math only works when the company is fine and the price is the thing that’s wrong. The calculator above tells you what the shovel costs. Whether the company is fine is the part you have to know yourself.