Did you buy low and sell high?

Did you buy low and sell high?

If you ask me this question or for that matter any other investor, they would say that all I try to do is buy low and sell high. It’s was necessary for some folks to sell securities at whatever rate they can get coz it was an emergency but blog is for all the other folks who sold their securities out of fear.

Looking back at 2007 highs

Buy Low and Sell High has not always what we do. Especially during the 2007’s earnings season when companies were reporting out of the roof positive earning surprises and at the same time you must have overheard folks discussing their stock market paper profits at lunch, gym and during other water cooler conversations. Such conversation was dreadful especially if you had not invested money other than your 410K into the stocks or mutual funds. I bet you went online to check your bank balance and also had a chat with your honey about that money which needs to be moved to the brokerage account. Yes, we have all done that some point in time. We did it due to the human tendency of fear of being left on the sidelines while people board the train. Looking at the stock market after a few months or years (if you were long on those positions), your investment doesn’t look that rosy does it? The reason for the super rally in the stock market was surely an “irrational exuberance” or super optimism but the recession/ depression we are in right now may well be coined as irrational pessimism. We as humans will do any certain act only to avoid pain or gain pleasure. So most of us buy stocks at high prices or during a rally coz we don’t want to be left behind when others/market makes progress. On similar lines we sell stock when newspapers, TV channels and other media are portraying super pessimism about the stock market. This is when we decide enough is enough and we refuse can’t take any more potential losses. We just went through a naïve investor’s mindset of buying high and selling low even when we know that the right thing to do is buy low and sell high.

Have you adjusted your 401k contributions lately?

I know some many people who changed their 401k allocations from high in stocks to low in stocks during Nov 2008 to April 2009 window. Guys..let me remind you that stocks market is cyclic with the only difference in each of the recession and the following rise being the cycle time. If stocks in your 401k fall by a huge percentage and you end up changing the allocation to something less risky then necessarily you have booked those losses and delayed the recovery of your 401k by several years (read my DCA blog) I can say this confidently because risk and return go hand in hand. There is no way in the world that you can recover the paper loses you took in your riskier allocation and come back up in green using the allocation which is less risky than the one you were previous in. Moreover if you changed your allocation at or close to the bottom of the stock market means that you took the biggest possible loses and having done that you have surrendered to the fact that your 401k’s recovery won’t be at a dramatic rate as its decline. My heart goes out to the older folks close to retirement who lost tremendous amount of money in their retirement account. I am confident that recovery is imminent, but chances that these older folks would be able to make full use of the recovery are slim. I hope some of these folks would have changed there allocations to bonds or other fixed income sources when market was at the peak.

What did I do?

I will admit that I was devastated by more than 50 % loses on some of my holdings and took loses last year as I Sold Low the securities I had bought High previously. But I invested (speculated) the same money back in some of the securities which had lost about 80 to 90% of their value as compared to their 52 week high. That is surely risky because their prices were beat up for a reason but you have to realize that these are the very securities which will and have bounced back up from their 52 week lows. So I moved my money to more risky positions with an anticipation of recovery. I take pride in the fact that I am back in green (marginally) after considerable amount of effort, research and gut checking. I am confident that it’s going to be a huge upside form here on forward.

The logic is simple here…even JT (Justin Timberlake) knows it … “That's okay baby 'cause in time you will find...What goes around, goes around Comes all the way back around”

Here is a link to an interesting article on similar lines at…

http://www.filife.com/stories/investors-lament-buy-high-sell-low

Dollar Cost Averaging (DCA) really works during economic depressions or recessions?

For our fellow bloggers who don't know what dollar cost averaging is, please see what sister wiki has to say about it. (http://en.wikipedia.org/wiki/Dollar_cost_averaging)

Well if you ask me that question, I think dollar cost averaging does work in an economic depression or recession. I am writing this when Dow Jones Industrial Average (DJIA) is at 8,574.65 vs. its March lows of 6,469.95.

Now the reason I like dollar cost averaging is because I don't have a crystal ball to tell me when the market is going to bottom out or when the prices of any specific security are at its lowest. We may have some lucky chaps in the audience who may have caught the bottom for a couple of stocks but chances of that happening are really slim to none in every stock you invest in and moreover I think it's pure luck and not reproducible.

So my suggestion is to look for companies which have absolutely no chance of getting bankrupt. I have learned the hard way never to say "no" so I will rephrase it as... single out companies which have the least chance of insolvency and which have enough cash on hand. Look at book value /share and free cash/share ratios before starting dollar cost averaging.

Who should invest using DCA strategy?

DCA strategy becomes very beneficial for people who are time and/ or knowledge poor. This strategy can work wonders for busy professionals who don't necessary have the time required during normal market hours to trade. DCA is a great tool for people to are less knowledgeable about stock market strategies which can be very confusing.

What kind of money should I invest?

I would like to think that the money which you won't be needing for another say 2 years should be invested using DCA. The amount of money you invest during each time period may be insignificant but when pooled together for your specific investment timeframe should be significant enough amount.

Apart from money what is needed to invest using DCA?

Investor using DCA needs discipline. Discipline is I decide and do!
I believe the biggest deterrent to DCA not working as expected is lack of discipline from an investor. I do understand that it takes some heart to put money in a company's stock while the price is moving down...but fellows that is the exact reason why we are interested in DCA. So as the stock value falls, fixed amount of money which you put in at every interval is going to bring in more units/shares.

Which companies should you invested in using DCA?

Again...it only applies to companies which are not going bankrupt...hint hint...look for companies which government has promised to be too big to fail :) I didn't say that...Pres Obama did...so do you think he will keep his promise...I hope. There are also a ton of other companies which are diversified enough not to fail even if its few divisions are underperforming.


Other Advantages of DCA

Deciding to conduct a DCA on a certain stock pressurizes the investors to put that amount of money away every period. So this pressure over an extended duration creates delayed gratification.


Other strategies: I call it DCA++

Invest same amount of money each time the stock falls a predetermined amount or percentage. So as the value of the stock falls, you will be able to buy more units/ share of the same company. This combined with traditional dollar cost averaging helps to buy stocks close to the bottom and leads to a better average price. So you will essentially have two triggers to invest the 1st being the DCA time period and other is the price of stock falling a predetermined amount. Be sure to use both these triggers and not just one.
I hope you had fun reading this DCA blog. Similar to any other investment strategy, I am sure DCA and my self coined DCA++ will have many critics but let me tell you this one of the simplest secret of wealth building.

Well...adios… until next time. Happy Investing!