You bought at 20 its at You follow the scoundrels advice and buy more It goes

You bought at 20 its at you follow the scoundrels

This preview shows page 129 - 132 out of 263 pages.

the overall cost of your stock position.” You bought at $20; it’s at $10. You follow the scoundrel’s advice and buy more. It goes to $5. You adviser has no idea whether this investment is ever coming back, because he didn’t know the value of this thing in the first place. It might be worth $1, for all he knows. But he also knows that if you sell now, you’ll blame him for your loss. He hopes that if he can keep you Dollar Cost Averaging, then someday the price of this dog will rise above your
Image of page 129
lower average cost. Sneaky. And effective in a bull market. But in a market like this one, Dollar-Cost-Average the wrong stock and you can throw good money after bad and lose it all. Could that happen? Sure. Easily. Happens all the time. Surely it couldn’t happen over a longer period, could it? The market can’t misprice a stock for years, can it? Unfortunately, yes it can and often does. Stocks can be and often are overpriced for ten years or more. Eventually they get priced correctly and then they crash. Look at the tech stock run-up in price from 1999 to 2009. If you DCA’d the Q index, which is a popular tech index comprising a hundred companies listed on the Nasdaq, with $12,000 a year from 1999 to 2009, you would have invested $120,000 at an average price of $47. In March 2009, the Q index was priced at $27. Because of the genius of DCA you lost 43 percent after ten years. Okay, eventually Mr. Market will price the Q properly for the long haul, and if you can take the pain long enough, you will eventually DCA yourself into a 0 percent rate of return. Someday In this market, “someday” could be a long way off. Meanwhile you’re decimating your retirement. Dollar Cost Averaging is stupid. It’s a brain-dead way to buy into a business or an index. The fact that it appears to be a simple and effective way to avoid buying at a bad price makes it a great tool for clueless financial “experts.”
Image of page 130
Built into the DCA strategy is the same old mindless assumption that has messed up professional investors for thirty years—that price is the same as value. There is nothing about DCA investing that demands you know the value of the stock you’re buying. If you’ve liked DCA in the past, then you’ll love stockpiling as a basic investing strategy. Think of stockpiling as DCA with a brain. It requires that you start buying with a big Margin of Safety and a good Payback Time, then continue buying as long as that MOS and Payback Time hold. If the stock price goes down even more, we get more shares for the same money. If the price goes above the MOS price or the Payback Time gets too long, we don’t buy. Instead of riding the market up and down through idiotic DCA, stockpiling gets you great returns by limiting your purchases to when the stock is undervalued. BACK TO BNI: WHAT’S NEXT? Now an important question: Once you buy some BNI at $52, what should you do from that point? Should you hope that the price of BNI will go up or down? Maybe answer this question first: If you’re going to be buying hamburgers for a long time in the future, do you want the price of hamburgers to go up or down? (Answer: down!) TAKEAWAYS AND ACTION ITEMS
Image of page 131
Image of page 132

You've reached the end of your free preview.

Want to read all 263 pages?

  • Spring '20
  • Warren Buffett

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors