On the double – Though easier said than done, ‘doubling down’ is a valuable tool for investors
The practice of ‘doubling down’ comes into play when, for whatever reason, the share price of an investment you believe in underperforms. If your original views on the stock still hold true, you are now looking at something that is even cheaper than it was before so the theory goes you should ‘double down’ by buying more shares at an even more attractive valuation.
While doubling down is an important weapon in the value investor’s armoury, however, it is also far easier said than done. There are all sorts of behavioural finance reasons why people do not like buying assets that have fallen in value but, simply put, investors are prone to feel badly about anything in their portfolio that is in the red and are more likely to want to sell up than they are to buy more.
For professional investment managers, it is arguably an even more difficult thing to do. Not only do they have to clear those inbuilt psychological hurdles, they also need to be able – at the end of every quarter – to explain to their clients that they own something that has not done very well and then justify to them why they have added yet more capital to this ostensibly ‘losing’ idea.
You do hear stories about fund managers ‘window-dressing’ their portfolios – that is to say, just before the end of the quarter, having a sweep-out of everything that has performed very badly so they do not have to have those kinds of discussions with their clients. Doubling down is the exact opposite – it is deliberately putting something unpleasant in the middle of your window for everyone to see.
It would therefore be nice if, somewhere down the line, there were a demonstrable pay-off for taking those difficult decisions and recent research suggests there could well be. Having recently been so rude about financial research, any reference we make to it probably needs some kind of Jellybean Trilogy caveat, but doubling down is often overlooked by academics and so we will go with what we have.
We are grateful to our friends at Empirical Research Partners for bringing to our attention the following chart, which itself comes from a 2014 working paper by Jonathan Rhinesmith called Doubling down. The chart illustrates some conclusions from an analysis of hedge fund performance data over the period from 1990 to 2013.
Source: Empirical Research January 2015
The chart compares the monthly performance of positions where managers have doubled down on an asset that has not done well with the monthly performance of the average hedge fund position. As you can see, the average position’s performance was about +1% a month while the average performance of the doubled-down positions was about +1.75%.
A significant uplift then – and even more so when you consider it is a monthly figure and would compound up very nicely over time. So there does now appear to be some statistical basis for believing there will be a large benefit if you are prepared to double up on a position that has experienced some kind of setback – always assuming you retain your conviction in the investment case.
If nothing has changed but the price, however, it follows that you are looking at a more attractively valued asset so you should be willing to buy more. Equally, if you are unprepared to do so, you should be able to justify that decision to yourself in objective terms.
Fund Manager, Equity Value
I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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