Often when a core holding stock is in a serious decline one of the first things a lot of investors and analysts will advise is that you should average down. They are absolutely wrong. You should NEVER average down on a declining stock until there are clear signs that the stock decline has ended. Recently an investor wrote me regarding SINA Stock. The stock since 2011 has collapsed almost 50% and continues in a bear market. SINA Corporation (SINA) is an online media company serving China and global Chinese communities. It is currently (May 10 2013) trading at a forward PE of 125 times and a price to cash flow (PC) of 123 times. The investor ended up owning 400 shares at an average cost of $102.51 per share. With the stock closing on Friday (May 10 2013) at $59.14, SINA Stock has a long way to climb in order for this investor to recover his capital.
SINA Stock 3 Year Daily Stock Chart
The three year SINA Stock chart below shows the severe decline in the stock. Many times stocks will enter their own bear market which can last years. What is even more difficult for investors is to have their capital tied to a stock that is declining while the overall stock market is climbing, producing profits for those investors not mired in declining stocks.
What the investor would like to do is establish a strategy that will generate income and try to recover his position in SINA Stock. This is not something that will happen in a short time and needs a combination of strategies to secure income and to know when to average down in the stock to turn what has been a disastrous trade into a profitable one. This is an excellent opportunity to discuss how to handle an enormous decline in share value to generate income and eventually end with a profit.
In this strategy article I will be looking at recovering the lost capital through combining covered calls, naked puts and averaging down. I am approaching this stock as if it was to have been a core holding stock. This is a FullyInformed Members mentoring tips strategy article. This article is 9 pages in length with 3000 words.
Handling A Severe Stock Decline – Mentoring Tips
Disclaimer: There are risks involved in all investment strategies and investors can and do lose capital. You always trade at your own risk. The author assumes no liability for your investment decisions. Read the full disclaimer.