After watching stocks such as Enghouse Systems Ltd., Amaya Gaming Group Inc. and CGI Group Inc. hit new 52-week highs almost daily this past week, we received a lot of questions from investors about whether they should sell, take profits or take some off the table.

But one question really stood out: "Should I average up?"

Generally, most investors think it is better to average down, that is, buy more shares of a company when its shares are on sale. The idea being to increase your share bet and profit handsomely when shares recover. This strategy can work, but more often than not you end up owning more shares in a problem company.  That's why we far prefer investors average up. This works best, of course, in a rising market, but we think that is the case right now. Even in a bad market, you often end up owning more of a winning position, which is never a bad thing.

Here are five reasons why averaging up is better than averaging down.

1. Happy investors sell less
   We have all been there: Owning some loser stock you just want to be done with. You don't care, can't stand to look at it and just want out. This creates additional selling on stocks that aren't doing well. Call it window dressing or simply frustration selling, but bad stocks tend to be the first to be sold. Buying on the way up, on the other hand, gets you into a stock that
   investors like, feel good about and makes them look good. That's a much better scenario overall.
2. Avoid problem companies
   We all know the phrase "catching a falling knife." It is painful buying a stock on the way down, only to be faced with more problems and more losses. Ask the poor (very poor) investors who bought Poseidon Concepts Corp. (stock suspended) at $12, $5 and $2 as the stock went all the way down to zero. Buying on the way up at least avoids stepping on a bomb.
3. Higher market caps attract more investors
   Small companies have a tough time attracting investor attention. But as a company's market cap rises, so does investor interest. A rising price simply means more buyers, especially in Canada where there is so much money focused on so few companies. Once a company's shares rise enough to get its market cap to, say, $500-million, its valuation improves because liquidity and trading pick up. It is the exact same company, but it's suddenly worth more to investors.  Averaging up can get you in front of this move.
4. Buy into higher earnings momentum
   A rising stock price means things are going well and other investors have noticed. Often, it is because earnings are accelerating faster than expected. This was the case with CGI last week. It's not foolproof, but buying into earnings momentum often results in good stock gains. In general, when business is good, it doesn't suddenly reverse course overnight. Averaging up gets you into this momentum stream.
5. Get a multi-bagger
   You can never triple your money on a stock unless it doubles first. If you want a stock to go up 10-fold while you own it, you can¹t be afraid to be a buyer when it is already up five-fold. It is simple math. Averaging up into your winners can get you a large position into a rapidly rising stock, and it doesn't get better than that. Plus, you know you have friends (other investors) on your side as the stock rises. Others with lots of money confirm your investment thesis and, as a result, your confidence level rises in owning a larger position in that company for a longer period of time.

Peter Hodson, CFA is CEO of 5i Research Inc., an independent research
network providing conflict-free advice to individual investors
(www.5iresearch.ca).