You write often about “averaging” stocks. What does it mean?

Last night we talked about how we average in, and did not explain what we meant. Averaging in means taking positions when it is believed a stock is near its bottom, but the precise price of that bottom is unknown. A whole position is not taken at once. Instead, positions are taken piecemeal when the stock pulls back on selling and appears to have hit support. That way we do not risk all of our capital on the position at once, and if the stock has further to fall, our cost basis is lowered.

As discussed last night, we do not want the stock to tank on us and just ride it down. If the Nasdaq rolls over and sells on high volume, breaking support, we would not remain in positions but would cut losses and wait for the next bottom to begin to form. We are inclined to start averaging in on great stocks that are beaten down (e.g., SUNW, EMC) because of the Fed rate cut that usually marks the bottom of a bear market.