Adding to Positions
What earns more capital
This post is part of my How I Run My Portfolio series—where I break down how I actually manage my capital. You can find the full series here.
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Introduction
For this post, I’m not talking about building out an initial position over a few days or weeks—or months, given liquidity in some microcaps. I’m talking about mindfully increasing exposure to something I already own.
Adding to a position sounds simple. You own something. You like it. You buy more.
Like everything else in investing, it’s more nuanced than that.
The market is there to serve you. It will offer you opportunities every day. Some of them will be useful. Most of them won’t be. The hard part is knowing when new capital should go into an existing position instead of something else—or nowhere at all.
The lesson I had to learn the hard way is that adding has to be earned.
The Lesson: Adding Has to Be Earned
It is not enough that the stock is down. It is not enough that I already own it. It is not enough that I want to lower my cost base. A position should earn more capital because the setup has improved.
The lesson I had to learn the hard way is to stop mindlessly averaging down. I even wrote an entire post about it.
I’ve said before that I try to lean into my own psychology rather than ignore it or pretend I can outsmart it. That matters here because adding to a position is rarely a clean decision. I already own it. I already have a view. I already have a cost base. All of those things can influence how I think.
A common question investors ask themselves is:
“If I didn’t own this today, would I buy it?”
That can be useful, but I don’t find it all that helpful for how I actually manage my portfolio.
To me, the better question is:
“On the margin, do I want to increase, decrease, or maintain my exposure relative to every other current and prospective position?”
Buying something from scratch and adding incrementally to something I already own are different decisions. They may overlap, but they are not the same.
Before adding, I try to ask myself:
Has my conviction increased?
Has the upside increased?
Has the downside decreased?
Is the price move external or internal?
Am I adding because the opportunity improved, or because I’m anchored to my cost base?
What else could this capital go into?
What Earns More Capital
A position earns more capital when the setup improves. For me, that usually happens in one of three ways: conviction increases, upside increases, or downside decreases.
Conviction Increases
This can happen when I understand the business better, management executes, a key risk fades, or the path to making money becomes clearer.
This is usually the cleanest reason to add. The business may not be cheaper, but I have more evidence that the original thesis is playing out.
Upside Increases
Maybe the setup improved. Maybe the market overreacted to a delay or underreacted to material news. Maybe liquidity disappeared for reasons that have little to do with the underlying business.
In those cases, the upside can become more attractive even if my view of the business hasn’t changed much.
Downside Decreases
The balance sheet improves. Cash flow becomes clearer. Debt gets paid down. Customer concentration falls. A major uncertainty gets removed.
The stock may be higher, lower, or unchanged—but the risk profile is better. The mistake is assuming price alone tells me whether something deserves more capital. It doesn’t.
A lower price can create opportunity, but only if the relationship between price, value, and risk has improved.
The Trap of Averaging Down - Why Averaging Down Feels Easier (For Me)
I think averaging down appeals to something deep in a lot of investors, myself included. We feel that the market is always testing our convictions. And when the market gets into a staring contest with you, you don’t want to blink.
If something was cheap at $10, then it feels even cheaper at $5. Why not add?
Your future IRR should be higher. Your upside should be better. You get to lower your cost base. It feels like you’re being rational, patient, and contrarian.
There are definitely times when shares decline substantially without the fundamentals of the business changing. In the companies I look at, that can happen fairly often. Liquidity is low. Investors are short-term focused. People shoot first and ask questions later.
But that doesn’t mean every 50% decline is an opportunity.
External vs Internal Factors
One of the things I try to separate is whether the price decline is driven by external factors or internal factors.
External factors might include:
A sector selloff.
A macro panic.
Temporary liquidity pressure.
A broad market drawdown.
A headline that affects sentiment but not the long-term economics.
Internal factors are different.
Execution issues.
Balance sheet deterioration.
Management changes.
Margin pressure.
A thesis driver getting pushed out.
A customer problem.
External factors can create opportunity.
Internal factors require more caution.
That doesn’t mean I never add when internal factors are involved. But I need to understand what changed and whether the expected return still compensates me for the risk.
When Averaging Down Makes Sense
Averaging down can make sense, but only when the lower price improves the risk/reward. A lower stock price is not enough on its own.
There is a long history of investors making this point in different ways. Warren Buffett wrote that prospective purchasers should prefer sinking prices. Howard Marks has written that if price is below value, future price movements are more likely to be upward than downward.
The key assumption is that value is intact.
Lower Price, Same Business
This is the cleanest version of averaging down.
The stock is lower, but the business has not materially changed. Maybe the multiple contracted. Maybe liquidity disappeared. Maybe the sector sold off. Maybe investors are focused elsewhere.
If I bought at a reasonable valuation and the valuation becomes even more reasonable while the thesis is intact, adding can make sense.
The key question is whether the price declined more than the business value declined. Sometimes the market is wrong. Sometimes I’m wrong. Those are very different situations.
Adding When Everything Is Down
Broad market selloffs are usually unkind to microcaps. If the market is off 10%, many microcaps can be off far more. Liquidity dries up. Investors de-risk. Small caps get sold first and asked about later.
If an external factor is pushing everything down, but not changing the value of the business, adding can be reasonable.
But there is nuance. Other things may have fallen more. The opportunity set may be better elsewhere. And just because the decline is market-wide does not mean every position deserves more capital.
The question becomes:
Is this company being pulled down by the broader market, or is something company-specific happening?
Price Decline Is Worse Than Business Decline
This is the messier version.
Sometimes the bet does get worse, but the stock price falls even more.
Maybe the timeline gets pushed out. Maybe the market dislikes the uncertainty. Maybe the path to the outcome becomes less clean. This is complicated because I need to be honest about what changed.
If the true potential of the business is still intact, and the stock price overreacts to the delay or uncertainty, adding can still make sense. But this is not the same as “the stock is down, so it’s cheaper.” It requires reassessing the thesis, the timeline, and the expected return from today.
When Averaging Up Makes Sense
Averaging up can be psychologically harder. At least it is for me. I’m getting better, but I’m a work in progress.
You are paying more than you paid before. Your cost base goes up. It can feel like you are reducing your margin of safety. But sometimes the margin of safety has improved even though the price is higher.
That can happen when the business performs better than expected, a key risk goes away, the balance sheet improves, or the path to making money becomes clearer.
Higher Price, Better Bet
Sometimes a company reports a quarter or releases news that materially increases my conviction. The stock may be up 10%, but my conviction may have doubled. That can be a good reason to add.
The mistake is getting too anchored to the original cost base. If the business is better, the downside is lower, or the path to upside is clearer, then paying a higher price may still be rational.
Everything Is Up
In long periods of a rising market, there is a good chance that adding means averaging up. That does not automatically make it wrong. But it does raise the hurdle.
If everything has moved up, I need to ask whether this specific position has become more attractive relative to the rest of the opportunity set. Sometimes the answer is yes. Sometimes the answer is that I’m just chasing what already worked.
Flat Stock, Better Business
Sometimes the stock does nothing, but the business gets better. Actually, this happens lots. The business improves and nobody cares. The market price hasn’t moved, but the bet has improved. Shares are flat for two years. Meanwhile, the company pays down debt, improves margins, grows earnings, signs new customers, or reduces risk.
This is an attractive situation if you can hold while the market slowly realizes what is happening. Or capital flows into the sector. In that case, adding may not feel exciting. There is no obvious dip. There is no momentum. No one is talking about it.
Different Psychological Hurdles
It is easy to talk about how to navigate these situations. It is much harder to actually do it. The same action (adding capital) can feel completely different depending on the path the stock took to get there.
Averaging down can feel easier intellectually but harder emotionally. The math may look better, but the position has already moved against you. I have to ask whether the lower price is opportunity or evidence.
Averaging up can feel harder because I’m paying more than I paid before. It feels like I missed my chance. But sometimes paying more is the right thing to do because the business is better, the thesis is clearer, or the downside is lower.
Here are some different examples that carry different weight psychologically:
Anchoring to Cost Basis
We tend to anchor to the original cost or adjusted cost of our position. That makes sense. It’s how we measure returns.
But once I already own a position, my cost basis should not drive the decision. The market does not care what I paid. The question is whether the position deserves more capital today.
Averaging Way Down
Averaging way down is hard.
If I own something and the timelines get pushed out, it can feel like I failed. Buying more after the stock is down 50% is very different than adding after a 10% pullback.
Adding after a 50% drop usually means I was wrong and I need to own that. Maybe the original timing was wrong. Maybe the thesis changed. Maybe I misjudged the business.
That is why adding way down requires more than just saying, “it’s cheaper now.” I have to admit my misstep at the same time while trying to be objective about the bet as it is today. No easy task for me.
Averaging Way Up
Averaging way up is hard for a different reason.
If a position is up 20%, but the evidence supporting the thesis is much stronger, adding may be reasonable. But adding after something has gone up 3x is much harder.
It may still be the right decision, but I need to be honest with myself. If I’m adding after something has multibagged, I likely didn’t size it properly to begin with. Similar to averaging way down, averaging way up can be a sign that I miscalculated something.
Maybe I underestimated the business. Maybe I underestimated the upside. Maybe I was too conservative with my original sizing.
That doesn’t mean I shouldn’t add. But it does mean I need to reassess the position from today’s price and today’s facts.
Timeframe Matters
Adding after five months feels different than adding after five years.
If I buy something and it drops quickly because of an external factor, and I think the market is overreacting, that is one situation.
If I own something for three years, the business performs roughly as expected, but the stock is down 30%, that takes a different psychological toll—especially if the broader market has been charging ahead.
Everyone has their own timeframes in their portfolio, but I need to be honest with myself here. If the stock has gone nowhere for years but the business is much better, that may actually be a good setup. But I also need to ask whether the original timeline was wrong, whether the opportunity cost was worth it, and whether the return from here is still attractive.
Having Hard Rules
I have talked to investors who use hard rules around adding to positions.
Some cap their exposure. Some only average down a certain number of times. Some will average up but not down. I understand the appeal. Rules can protect you from yourself.
I don’t have hard rules around increasing exposure to positions, but I do think the act of adding should force a fresh assessment. Whether I’m averaging up, averaging down, or adding to something that has gone nowhere, I need to know why the position deserves more capital.
Examples: When Adding Worked and When It Didn’t
I’ve had both averaging down and averaging up work. I’ve also had both go poorly.
That’s part of why I don’t think the answer is as simple as “average down” or “average up.” The important question is whether the position deserved more capital at the time.
Averaging Down and It Worked
I have held Viemed (VMD) for a long time, but my position size has moved around.
I added in April and November of 2025. Both additions are ahead of the market so far, though not by much. I also added during the start of the COVID selloff in March 2020, which probably fits here as well. In those cases, I believed the price had moved more than the thesis had changed.
Averaging Down and It Didn’t Work
Sangoma (STC.to) is an example where averaging down did not work for me.
I owned the company for a long time. After the SaaS bubble burst in 2022, I added a couple of times on the way down. My thinking was that a 50% decline meant it was cheap. I was wrong. The lower price was not just opportunity. It was information.
Averaging Up and It Worked
XPEL is one example where I intentionally increased my position at a higher cost basis. This was during the March 2020 selloff.
A cleaner example is IWG Technologies, which I bought over a decade ago and was eventually acquired by private equity. The company made potable water treatment systems primarily for business aircraft.
I was initially interested because of the cheap valuation and large cash position. But as I continued my research—including a site visit—my conviction grew. I gained more confidence in the business and the upside potential. In that case, the business earned more capital as I learned more.
Averaging Up and It Didn’t Work
Geodrill (GEO.to) has been a frustrating hold.
At one point, I added after a strong quarter and outlook. My thinking was that we were starting to see the earnings potential in the business, the shift toward more senior operators was nearing an end, and the valuation looked cheap.
That turned out to be a mistake. The business has since underperformed my expectations, and my confidence in the setup was too high at the time.
The Point
The point isn’t that averaging down is good or bad. The same is true with averaging up. Both can work. Both can fail.
What matters is whether the new capital is being added to a better opportunity—or whether I’m simply reacting to price, anchoring to my cost base, or trying to fix an earlier mistake.
Closing Thoughts
Adding to positions is a challenging part of running a portfolio.
Averaging down can feel rational, but sometimes it’s just defending a mistake.
Averaging up can feel uncomfortable, but sometimes it’s the right decision because the business has earned more capital.
The stock price matters. But it doesn’t matter in isolation. What matters is how price, value, conviction, upside, downside, and opportunity cost have changed.
For me, adding is not about proving I was right the first time. It’s about deciding whether the position deserves more capital today.
How do you think about adding to positions? Do you find it harder to average up or average down?
Thanks for reading.
Dean
If you found this useful, you can follow the full series here.
Long - VMD, GEO.to,
No position - STC.to, XPEL