People often ask me what exactly I mean when I say: “Backing up the truck.”
This is Doug Casey’s colorful expression for averaging down—but the implication is doing so with gusto.
Key Point: You don’t want to do this for companies that are failing in some material way, but for the clear winners that go on sale for no reason specific to the company (fleeting market fluctuations).
Let’s put that in numbers…
I try to follow a version of Doug’s three-stake formula: I buy 20% initially, 20% on the next notable fluctuation, and 60% on a major retreat in share price. I think of the first two 20% stakes as building my initial position. The third, 60% stake is my “back up the truck” stake.
The bigger question is when is averaging down a good idea, vs. just dumping more money down an ever-flushing toilet.
To answer, I’ll borrow from my other mentor, Rick Rule. He often says that one should never buy a stock unless one can honestly say that one would be happy to double down if the stock dropped by 50% with no bad news from the company.
That’s no joke or rhetorical flourish.
Junior resource stocks can fluctuate that much intraday simply because some shareholder got a margin call or a fund was facing redemptions.
For the kind of stocks I own, the answer is easy: if there’s nothing wrong with the company and it goes on sale, I’m happy to average down.
This is, of course, not always the case—perhaps even usually not the case. Some things can be very bad for a company even if they aren’t specific to that company. For example, if copper drops below the cost of production, that’s not a copper miner’s fault. It’s not a company-specific problem. But it is something that will hurt the company and can be expected to result in lower share prices until prices rise again—if the company survives that long.
And company-specific bad news, like nationalization, may not be management’s fault, but that’s irrelevant. The point of owning the stocks is to generate capital gains (or dividends, for those so inclined), not to support management because bad luck is not their fault.
The easiest, or clearest example of when it makes sense to back up the truck for more is when a go-to company (a major, household name) goes on sale due to a market fluctuation. As bullish as I am on gold this year and for years to come, such a major play for which I had zero concern on profitability or survivability would be a no-brainer if it went on sale.
The same would go for other core holdings on sale for no reason to do with the company—but then due diligence on these specific companies must be very strong. Given my way of balancing risk and reward, I’d want to be as free of concern about them as possible before backing up the truck.
If I were 19—or 90—with no dependents to worry about, I’d back up the truck on riskier plays as well—as long as the sale price had nothing to do with the specific company and the basis for speculation remains intact.
As it happens, I just did exactly this in The Independent Speculator portfolio. I backed up the truck for an additional stake in a go-to name that I think is oversold and such a terrific bargain, I see it as a no-brainer.
I also just went 10x on a junior that is way cheaper than when I first bought it even though the gold endowment in the ground is much larger and closer to becoming a mine. I don’t normally go 10x, but due to unusual circumstances, I had a rather small position. As was, if the share price went 10x, I’d have had a nice gain to boast about, but I wouldn’t have made much money. Now I have more serious skin in the game—and having backed up the truck big-time, I stand to make a meaningful sum if I’m right about the company.
No arm-twisting, but if you’d like to know which stocks, that’s what clients of The Independent Speculator pay to know.
The idea itself, however, is yours free of charge.
Caveat emptor,
PS: Stay up to date with my thoughts on other strategies such as the above, the economy and its investment implications, and my take on specific commodities like gold, silver, uranium, copper, oil, lithium, and other natural resources by subscribing to my free, weekly Speculator’s Digest. You’ll receive information not published anywhere else—without a flood of daily advertisements.
