How to Reduce Cost Price on Your Stocks

If you’ve bought a share in a wonderful business earlier this year and are experiencing that the stock price keeps falling you might be in a situation where you’re considering selling. But what I will teach you today is to do the exact opposite – I’m going to not only teach you why to hold on, but also how you can reduce the cost price of that wonderful business in the current climate.

The first thing you want to do before you proceed is to check if the business is still wonderful. Check your 3 key numbers and revisit the case you’ve built using your checklist. Is the company still healthy and wonderful? Then keep calm and carry on reading…

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Averaging down

What you can do is that you can lower the money you have in the investment. This is called reducing your basis or averaging down. A strategy you should only use on quality businesses.

Let’s say you buy a share in a healthy company XYZ at $100 a share. Since your purchase you learned that this price was actually expensive for this company because you learned how to value a business (for example by taking my course). Using the calculation tool, you found the stock price you should buy this business for and let’s say that it’s $50.

Another scenario could be that you calculated your buying price and bought at your “margin of safety” price, which was $100, but the stock keeps falling because of fear in the market – you’re still owning a wonderful business.

Now the stock has fallen and it’s trading at $50 a share.
Your cost price is now $75, and you’ve decreased the price which you originally bought at with $25

$100+$50= $150 divided by 2 because you have two shares now = $75. 

The company pays a dividend of $1 per share and hurray – your cost price per share is $73. You can keep track of your investment by using excel.

For most traders this technique goes against common sense. Most people chase returns and only buy when stocks are going up and some pull out money when stocks are going down. I do recognize that it’s counterintuitive but if you – like I recently did – buy a company for 12, but it's worth 55 per share and the stock falls to 11,20 then I can buy even more and reduce my basis.

 

"Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down,"

Warren Buffett 

Can you lose money when reducing your cost price?

Absolutely! This only works for wonderful businesses and great exchange traded funds (EFT) like the S&P 500 ETFs. If you’ve bought an unhealthy business or an EFT packed with trashy companies, this reduction method is a very bad strategy for you. If you don’t know if your business is wonderful, this is how you can do a quick assessment (but you’ll want to study more) – click the link to my article: The Easy Way to Get Started.