It boils down to fundamentals. If the stock is trading 50-60% below valuation, it doesnt matter, as in the long run, there will be reversion to the mean. I am already used to holding stocks that trade 50-60% from purchase price. Will usually average down to bring down the cost. Overtime, they usually recover. However, there is a mark difference between 50% drop and 5x drop of 10%. 50% drop has a high probability of structural issues within the stock, as usually stocks with strong fundamentals even if they drop is in series of bad news. Structural issues will be very difficult to recover, as it implies damage to the fundamentals of the company. A review of the position will be urgently required.
How Much Pullback Are You Willing to Tolerate?
Do you agree with the statement:
The higher the tolerance for pullback, the more likely to achieve higher returns?
Which one do you pick?
Enduring a single 50% pullback yields a 100% return; enduring ten 10% pullbacks results in a final gain of 159%.
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