When to Double Down on Your Investment? Here is a 5 Point Guide

Emotions are an important part of what makes us human. When it comes to investing, though, emotions may be problematic.

Investment decisions are essentially mathematical exercises, but investors unknowingly allow their emotions and biases to play a role while deciding upon their investment choices.

Doubling down on investment is one such strategy. It's a straightforward investment technique in which you double your investment transaction.

Investors can make more money but take the risk of losing it all. It should not be carried out blindly or based on vague advice or stock market tips.

Let's look at an example.

If you purchased 100 shares of a stock and the price fell, you could 'double down' by purchasing another 100 shares. This lowers the total cost of your 200 shares.

Hopefully, the stock price will climb again and surpass the average cost of your 200 shares, allowing you to sell them for a profit.

Investors should be very careful before taking any additional position in such stocks. Here are five suggestions to decide which stocks to double down on and when to do so.

#1. Choose firms with rapid growth or a dominant industry position

Accelerated growth rates are one of the strongest indicators of future investment performance. A fast-growing company that speeds up is often a big long-term winner.

Look at quarterly growth rates for signs of improving market share or new product acceptance. Compare it's growth rates with industry growth rates to identify those that genuinely stand out.

#2. Change in trend

Changing markets, technologies, and consumer expectations can have major impacts on the way companies operate. One of the simplest things you can do to better recognise trends, is reading research reports.

Often, many companies perform original research and compile their findings in one large report. By taking the time to read through it beyond the executive summary, you can almost always find something in it that's valuable and relevant to what's trending right now.

Trend analysis helps you understand how business have performed and predict where current business operations and practices will stand in the future.

#3. Promoter increasing stake in the company

An increase in stake by promoters who have skin in the game is considered as a positive sign for a stock. It indicates that insiders are confident about the prospects of the company.

Rising promoter stake can lead to an early signal of improving fundamentals and, of course, a sharp rise in stock prices.

However, it's rare to see promoters' holdings grow on a consistent basis. They generally purchase to shore up their holdings following a dramatic market fall.

#4. Consider the timing while doubling down your investment

When it comes to buying or selling shares, timing is a crucial factor in the stock market.

The double down investing strategy may be particularly suited to times when there is an abnormal level of fear and panic in the markets. This is because panic selling can result in high-quality stocks trading at cheap valuations.

For example, some largecap stocks were trading at 20-40% discount in March 2020 compared to pre-covid highs.

Use caution when selecting stocks you think are best positioned to survive the shakeout in the economy.

#5. Always examine company's fundamentals

Before averaging down a position, analyse the fundamentals of the company.

The investor should determine if a substantial drop in a stock is only a temporary thing or an indication of a deeper malaise.

At the very least, evaluate these points before making any decision - the company's competitive position, long-term earnings projection, business stability, and capital structure.

Bottom Line

Doubling up on winning stocks is certainly not recommended for everyone. When anything goes wrong with a large portfolio position, it might take years to recover.

If you are an investor with a long-term time horizon, then you can tolerate the volatility and the possibility of and even bigger decline before things improve. Near-term macroeconomic concerns can actually offer you amazing double down investment possibilities.

But if you're more short-term oriented, doubling down is not ideal for you.

If you can find an investment gem and increase its position in your portfolio, you may only need one stock in your entire investing career to make yourself wealthy.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...