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Fool Mailbag: When Should You Double Down on a Falling Stock?

In this segment from the Motley Fool Money radio show, host Chris Hill asks Million Dollar Portfolio's Jason Moser to discuss the question of when to rethink your investment thesis on a stock, and when to recommit despite a drop. How can you decide if adding to a position when the stock has gotten cheaper is getting a bargain versus throwing good money after bad.

A full transcript follows the video.

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Chris Hill: Question from Charlie Fox in Arizona. "I'm thinking about picking up more shares of Diplomat Pharmacy (NYSE: DPLO). I've held through the drops, and I'm asking if doubling down is a good idea here." Jason, we can run this beyond Diplomat Pharmacy, because, as we say from time to time, we can't give personal advice. But I am intrigued by this idea and your gut reaction when, as it has probably happened at some point in your investing life, you buy shares of the company, you feel good about it, it drops 25%, 40%, something like that. What is your gut reaction in those situations? Is it to double down?

Jason Moser: Maybe not the gut reaction. It is one of the things that comes into play, though. I'll use a very recent example, because I have a modest investment in TripAdvisor (NASDAQ: TRIP). And it's down about 45% from my cost basis. So I've been batting that idea around in my head around a lot. I think the key for this is to always look at it from the perspective of the market knows more than you do. Let's throw that out the window immediately and figure the market is on to something.

The big difference between what, perhaps, we as individual investors and the market can apply here is our timeline. The longer the timeline, the more you can let the story play out. With TripAdvisor, for example, I'm looking at it from the perspective of, can I identify why I think this is still a good investment? And for me, not only is it a good brand, and not only does it provide a valuable service, but when we look at the actual metrics of the business, it's still a platform that's very engaged, growing users. The metric that really matters, revenue per hotel shopper, that is recovering nicely as well. So I see these metrics that indicate to me, this is not a platform in peril, it's not a platform in decline.

But perhaps the market is a little bit upset with some near-term promises they made in this instant-booking initiative that hadn't really played out the way they thought it would. So I think the key, if you want to think about doubling down on a stock, go dig in, figure out a little bit more, learn more about the business, and really identify why you think that business is going to be OK and why it's going to be able to continue to perform well. Chances are, it's going to take a little bit of time for it to play out. But if you can identify it, that can be very rewarding in the end.

Chris Hill has no position in any of the stocks mentioned. Jason Moser owns shares of TripAdvisor. The Motley Fool owns shares of and recommends TripAdvisor. The Motley Fool recommends Diplomat Pharmacy. The Motley Fool has a disclosure policy.