In Dips, Rule Breakers Add Up & Don’t Double Down

Your paycheck lands on Friday. You open your brokerage app to invest a slice of it, and the screen is red from top to bottom.

Your eye goes straight to the worst number. Maybe it's a stock you bought last year that's now down a third from what you paid, and it fell again today. It looks like a bargain. It's fallen farthest, so it seems to have the most room to bounce.

Plenty of investors are feeling that pull this month.

When Everything Looks Like a Sale

The Nasdaq-100 has dropped about 7% since its Oct. 6 peak. Artificial intelligence (AI)-linked companies carry so much weight in the major indexes that their slide is dragging down portfolios full of businesses that have never sold a chip. When nearly everything is down, every falling stock starts to look like a markdown.

The second of the six Rule Breakers Habits is built for weeks like this one:

Add up, don't double down.

Simple enough on paper. It gets harder when you're holding a big loss and fresh cash at the same time.

Why the Loser Pulls at You

Doubling down feels like repair work. Buy more shares of the loser and your average cost drops, so a smaller rebound gets you back to even.

But the company has no idea what you paid. The only question new money should ask is which business is more likely to be worth more five years from now. A stock that's down a third is telling you something. Either the market has misread the business or the business is cracking, and you don't yet know which. Doubling down bets fresh dollars that you're right on the very position where you've been wrong so far.

What a Winner Looks Like in a Bad Month

Now look at Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL). Rule Breakers recommended it in June 2022 at a split-adjusted $113.75. It has nearly tripled since, comfortably ahead of the S&P 500.

It's also down about 6% since Oct. 6, a little less than the Nasdaq-100. The business hasn't given investors an obvious reason for that drop. In its most recent quarter, revenue grew 24% to nearly $120 billion. Google Cloud, which rents computing power and AI tools to other companies, grew 82%. Customers have signed contracts worth $514 billion in future Cloud revenue, roughly five years of sales at the current pace.

Spending is the main risk. Management raised its plan for the year to as much as $205 billion, most of it for the data centers behind its AI. If demand cools, that spending gets hard to justify. Alphabet reports again on Oct. 28, so the next test is days away.

What You'd Have to Believe

To pour new money into your laggard, you'd have to believe the market has misjudged it and that you're finally right. Try this test: Pretend you don't own it. Would you buy it today based on what the business is doing right now? If you'd buy it with confidence, that's a fresh decision. If you're hesitating, you're probably just trying to get your money back.

To add to a winner like Alphabet, you'd have to believe a business that's been working will keep working and that this month's slide says more about nervous traders than about the company. Most of the time, that second belief is the easier one to back up.

Your Take

Which stock in your portfolio is tempting you most this month: the one that's fallen farthest or the one that's been proving you right? Tell us which way you're leaning and why.

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