The Motley Fool

Quick Thought Of The Week: Fiasco

What a fiasco. UK Prime Minister, Theresa May, has suffered a humiliating – but not entirely unexpected – defeat in the House of Commons. Consequently, the UK’s exit from the European Union has now been thrown into turmoil.

Nobody knows what will happen next. Those who say they do are just guessing. The vote in Parliament has pitted the sovereignty of the people against the sovereignty of parliament. It’s fine when the two are aligned – a disaster when they are not.

Problem is there should never have been a referendum in the first place. The people in the UK were asked to vote on a black-and-white issue two years’ ago. But Brexit is not binary. Brexit is far from black and white. It has more shades of grey than an EL James novel.

Now armed with more information, some of those who voted to leave are suffering from buyer’s remorse. But the UK government refuses to let go.

It has insisted on seeing it through – even if it meant humiliation and defeat in the “meaningful vote”. Instead of trying to fix a leaking boat and spending an inordinate amount of time bailing water, it would have been far better just to find another boat.

There is an investing lesson in there for all of us. Yes, there is. How often do we hear about averaging down as a strategy to lower the unit cost of a share we own that has fallen significantly below our initial purchase price? Many investors do it.

In theory it sounds like a good idea. The arithmetic argument for averaging down can be quite persuasive. But here are a couple of home truths.

Firstly, your paper loss has not changed. Buying more of the same share at a lower price does not affect the performance of the share that you initially bought. Secondly, your new money could be better deployed elsewhere.

But it pays to be selective. Buying more shares of a company – whose fundamentals have not changed – at a lower price can make sense. But don’t do it if it is a leaking boat….

…. I wish the UK government would do the same.

A version of this article was first published in Stock Advisor.

The Motley Fool’s purpose is to help the world invest, better. Click here now for your FREE subscription to Take Stock — Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock — Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.

Like us on Facebook to keep up to date with our latest news and articles. The Motley Fool’s purpose is to help the world invest, better. 

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.