Don't average down. Don't play in traffic.

In one respect, every investor nowadays has it good: an almost infinite amount and variety of information and advice is available at the cost of a few finger taps. The internet is simply bursting with it.

Ghost Money finds a lot of it to be valuable, too, so long as one doesn't latch on to a financial guru and treat everything he says as revealed truth. But there is also to be found online quite a bit of piffle, of which Ghost Money is a representative example.

We generally approve of Seeking Alpha as having a fairly good signal-to-noise ratio. It's all written by outside contributors (mostly in the investment business), there's no obvious attempt to present a unified viewpoint -- you can sometimes read columns urging a "buy" and a "sell" of the same stock on the same day -- and the reader comments are often well informed and decently written, unlike those from the juveniles who spin out endless threads at Zero Hedge.

But even Seeking Alpha carries articles from time to time that make you wonder how they got published. A website, unlike a print publication, doesn't have a fixed amount of space that must be filled, and there is no shortage of contributors at Seeking Alpha.

Here's one example from the other day. It's from a certain Dr. Kris, who has 64,819 followers -- must be quite the queue -- and, according to her bionote: "Combining her love of cooking with the stock market, she's devised recipes for investment success designed to please the palate of most investors. Dr. Kris currently manages a private equity long/short portfolio and writes of her current research projects that appear on her website, StockMarketCookBook.com." 

Dr. Kris tells us that "averaging down is a bad investment."

The concept of "averaging down" is straightforward. Say you buy a hundred shares of a stock at $100. It goes down to $90 and you buy more a hundred more. Your average cost per share has now been lowered to $95. Repeating this action as the stock falls will lower your average cost per share even more. Sounds good, right?

It depends. If you're investing in the stock-that is, you're viewing this as a trade and not a long-term investment-then averaging down is a strategy that runs counter to your goal of making a profit. Traders use buy and sell indicators to determine when to enter and exit positions. Should a stock fall enough to trigger a stop-loss, they exit the position and take a small loss at the most. Stock traders either don't care or don't know enough about the company's fundamentals to determine whether or not the drop in price is due to a temporary lack of buyers or whether it's reflecting a more serious problem that they don't know about or hasn't yet surfaced.

Ghost Money does not believe in stop-losses, at least near the buy point. The market is neither efficient nor rational, and short-term movements are random. Unless the stock goes down on important fundamental news, stop-losses are simply reacting to randomness. That is not a good "recipe" for trading, in our opinion.

Dr. Kris adds, "The situation may be different, though, if you're investing in the company itself. If, after doing your homework, you are convinced that the company is a good value and you are planning on holding the stock for a long time, then averaging down may work to your advantage. The operative word here is 'may.' Even if you're convinced that management is on the right track and the fundamentals are solid, I still have a bias against this approach for a couple of good reasons."

We won't discuss her reasons in detail -- what they amount to is that you risk falling in love with a stock and you can be fooled by crooks running a company. Both are worries, all right, but apply to any stock investment; they have nothing in particular to do with averaging down.

Dr. Kris's argument isn't wrong, just meaningless. Even if you buy a name for a trade, let's say purely on the basis of technical analysis, whether to stay, go, or average down is a decision to be made on the same basis that you bought it -- not because averaging down is bad.

As for "investing in the company," well, you should have researched it thoroughly before you bought it, not if it dips afterward. Except in the (rare) case of a substantial change to the company's fundamentals -- a downgrade from a brokerage firm is not one of those, in our view -- why not help yourself to another serving if the price goes down, if you can afford to and want to commit more money?

This situation was presented to us just the other day. We took 30 shares of United Technologies (UTX) @ $73.30 and thought it was a reasonable move. The next day it (along with the market) got whacked. Dr. Kris would presumably have urged us to have put a stop in place, perhaps around 72, which would have meant UTX being hauled away with the trash. Instead we bought 30 more, for the same reasons we  bought it the previous day, except this time @ 71 (the amount of the limit order we put in).

At this moment, UTX is switching owners @ 73.34. Because of the averaging down, there is a gain of 1.28 percent, net of trading costs.

Dr. Kris's insight actually seems to boil down to: averaging down is good if you've got a winner and bad if you've got a howling dog. Or, as Will Rogers said, "You should only buy stocks that go up. If it won't go up, don't buy it."

Keywords: [Seeking Alpha] [averaging down] [stop-loss] [UTX]

Ghost Money's author does not claim to know what he's talking about. He is not an investment advisor. This site is for entertainment, if it can even manage that.