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Paul Tudor Jones was once pictured with a sign saying "Losers Average Losers". I've often seen this taken as a statement against trend trading. In other words, "if you keep doubling-down on positions that are losing, eventually you'll blow all of your money on something that never recovers". That more or less makes sense to me. However an old note of mine says that it also destroys the idea of dollar-cost averaging. How can this be? For example, I can't see how you could ever go bust dollar-cost averaging on a big index like the S&P500.

Do I misunderstand some part of this quote or the system of dollar-cost averaging? For example, if you did dollar-cost average on something that was going bust, you would end up with a large collection of worthless shares that you mostly bought cheap and will have therefore lost on average by chasing a loss. However, that example doesn't seem sufficiently global. Is there some different mathematical implication if you dollar-cost average on a large number of stocks, some of which fail?

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An investor with a long term outlook who believes his fundamental analysis is correct will systematically dollar cost average because at the onset, he has 30-40 years until retirement. In addition, his skillset tends not to include trading ablilty.

Averaging down is not a professional trader's modus operandi. Breakevenitis is a bad habit. It not only ties up additional capital but it also increases the size of the bet (and risk) on a trade that is not going as planned. Hence the old trading expression: "Let your profits run and cut your losses".

Good traders strive to adapt to changing facts rather than marrying a bad position. They consider DCA to be throwing good money after bad. Hence the expression, Losers Average Losers.

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"if you keep doubling-down on positions that are losing, eventually you'll blow all of your money on something that never recovers"

I partially disagree. If a big company, one that is not in trouble, reduces 50% in value for no apparent reason at all, it's may be time to buy. Just don't completely forget diversification.

Usually, such reductions of value happen only when the general trend of market is down. It is hard to find stocks 50% for sale when stocks of other companies are not for sale.

The wisdom here is that usually there is a reason for a particular stock to reduce in value. You'd better be aware what the reason is.

For example, I can't see how you could ever go bust dollar-cost averaging on a big index like the S&P500

You can go bust. Invest too much, ignore the recommendation to keep an emergency fund. Then you may have to sell the stocks at lowered prices.

The market can stay irrational longer than you can stay solvent.

But, in principle, you're right. Buying S&P 500 index is nearly equivalent to buying stocks of Corporate America, if such thing was possible. The S&P 500 has a certain dividend yield. The investment is inflation protected. Also, you benefit from GDP growth by having a certain share of Corporate America.

From this, we can calculate the expected return. For example, dividend yield can be 4%. Inflation can be 2%. GDP growth can be 2.5%. From this, you get 8.5% return. Plug in your best estimates for dividend yield, inflation and GDP growth and you get best estimate for the return.

The trouble is, this return is guaranteed only on the very long term. If you do a short-term investment, then the valuation difference between the time of purchasing and time of sale makes a large percentage of your return. In such a short-term investment, your return could even be negative.

The benefit of dollar cost averaging is that you diversify in time. You buy stocks when they are expensive, but you also buy stocks when they are cheap. You get more stocks when they are cheap, obviously, so such purchases make a majority of your return.

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  • I think that we've both got our senses of scale wrong, and I've edited my question to reflect this. As you've pointed out, dollar-cost averaging on something that essentially can't fail is an obvious good move and as I've tried to point out in my edit, "losers average losers" probably makes sense if you're only investing in a handful of stocks. I think the relevance of the quote my lie somewhere in a mathematical approach to the example of DCA investing in multiple stocks, some of which completely fail. – J. Mini Mar 27 at 18:32

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