cost basis manipulation for newbies

Right..... this is all assuming a bounce..... and on the flip side at the market risen, you would not have been fully invested and you would have missed out on the gains. I've read a lot about this, and while it certainly can work for a day in terms of showing your gains as flat vs. losing, I've never been a big believer in it.

If you're generally correct on your investment decisions, then you should be fully invested into a position right from the start. Let's say you're right 75%+ of the time. By only being partially invested you are missing out on gains 3 out of 4 times you invest. This is lost opportunity that the habitual dollar-cost-averager misses out on. If you're a value investor, for example, and you believe the company you're buying is a steal - right here - right now - you should be fully invested for that position. If your analysis is correct, the stock price should RISE and you will miss out on gains by only partially investing in it. For the 1 time out of 4 you were wrong, let's assume you were originally "half invested" and now you spent out the other "half" that had remained cash. In the end, your net gains will only be measured from the average of the two buys (obviously). The original position ends up gaining exactly what it would have gained anyway. Therefore, the 1 out of 4 times you are better (assuming you are a good stock picker) by dollar cost averaging, the improvement is only on the marginal half you added, which will certainly NOT offset the other 3 out of 4 times you were correct right out of the gate.

Just so everyone knows, Ellkell is actually one of my selected Gurus and I have a lot of respect for him. I've noticed in his trading that he certainly likes to buy the dips and do dollar cost averaging. My argument would be that he would do better if he FULLY bought the dips....then FULLY SOLD the peaks, and waited for the next dip. I believe his legging in to positions over the recent bull run has actually retarded his overall performance, albeit marginally. If a trader is prepared to call out bottoms and enter a position, he ought to also be prepared to call out tops and know when to exit.

I would further argue that dollar cost averaging can help one type of trader/investor: The one that's usually wrong. If you find yourself constantly buying stocks at the wrong time and watching the prices fall after you enter, dollar cost averaging would probably work out well for you. Then again, if you're that kind of trader/investor, you may want to either stop trading or study a bit more anyway before committing your hard-earned dollars to the market.

Here is some further reading on this topic:

http://st​atic.seeki​ngalpha.co​m/article/4​0698-dolla​r-cost-ave​raging-is-​complete-bs

I am usually wrong. thats the whole point. think for a moment about what i know. just about nothing. im not in control of markets nor of individual stocks. i dont know as much as the typical person who devotes too much time to stocks, nor do i have any inside information on any company really.

all i can really do is monitor prices. price alone is the best information i have. one person could not really track all those wild lines and charts either. all we can really say is 'is it cheap'? how do we tell? has it fallen or risen lately. thats about all we get out here. booms bust and busts boom.

now think about what kind of needle in a haystack you are having to find in the markets. thousands of stocks vie for you attention, and by the time you've found one you do like, then you have an even harder problem. timing the whole market.

you must then time everything? predict unemployment rates in china for tomorrow? be the guy who correctly figures out that a major terror event is about to occur or maybe a default by a major nation? no way. all you can do is look where the spring may be getting tighter and tighter and jump in.

dollar cost averaging is great in the event you dont know what is going to happen in the near future. the value of 'not losing' is twice as high as the opportunity cost is in 'not winning'. know how clueless you are. its the only weapon you actually have got.

But if we're that clueless, we shouldn't be trading. I may not know unemployment rates for China, but I do know that the U.S. has lost a million jobs since the March 9 bottom. Now you tell me: What do you "predict" this will do to earnings? Is it really hard to figure out what earnings might look like after more severe job loss? E=mc^2 ?

Not everything is as up in the air as your comment suggests. We may not be insiders, but we are capable of identifying macro trends and come to reasonable conclusions based on those trends. I know we can't predict the singular events you mentioned, such as a nation defaulting, or a surprise attack by a foreign power. But just because we can't predict that doesn't mean we should roll over and assume that therefore we can't predict anything.

I know that you use stock screeners, as do I. Let's not blow this out of proportion: Out of the "thousands of stocks" you mentioned, they can be whittled down to a managable universe very quickly with the right search variables. Otherwise, what you're really saying is guys like Warren Buffett are just a fluke. He wasn't always an insider....so you're suggesting that he just got lucky and happened to buy the right companies over and over again. You and I know that's not true: The companies he bought were, in fact, "cheap" using the criteria of a value investor (ie, free cash flow, growth, etc.)

He didn't get it right every time, but he gets it right more often than not (I'm guessing better than 3 out of 4 times). And by the way, don't undercut yourself by saying "i dont know as much as the typical person who devotes too much time to stocks"....... the typical guy knows almost NOTHING about stocks, and you far outperform the typical guy - even the typical guy that "devotes too much time to stocks". It's not an accident, and I would argue, it's not dollar cost averaging either.

i guess what im saying is the more you internalize the issues of the market into your portfolio the better. being in ten stocks is less risky than being in one. rebalancing to sell the highs and buy the lows is also reductive of risk and profitable if the market is either behind you or flat...so what to do when it may be turning south???

entry point is so crucial that it really is worth staying in 90% cash when you first come in. if you pick ten stocks and drive your entry points down you reduce risk and bounce higher. its like the old joke where the old bull tells the young bull to 'walk down to the valley' instead...

you are right to point out the awesomeness of screener use. i guess it all comes down to control for me. i cant control the markets like i can a fixup house. at least i can fix it, can walk around in it, can detect real value. stocks i have to take someones word for it and thats just not good enough for me. i doubt its enough for buffett either.

"...so what to do when it may be turning south???"

For the average investor, just go to cash and wait it out for the next buying opportunity...... Why stay exposed? If you bought well in the first place you should be up and take your profits right there. For the more sophisticated, maybe some light positions in short ETFs and a touch of gold/silver.

This isn't about controlling markets, it's about interpreting them. If you believe a decline is right around the corner, just go to cash and stay out of harm's way. The only issues with what I'm saying are 1) You've got to have some sense of where the market is going (not control), and 2) You will be taxed at a higher rate and you must overcome this via higher returns

I challenge you to look at your own trading over the past 2 weeks. Maybe you should verify with yourself to see if you have done better going 100% into a position initially. I don't think you dollar cost averaged everything.

As a side note, I'm curious as to why you are so bullish with the increasing rate of unemployment (again).

unemployment is a lagging indicator. thats why. i didnt find it all that shocking actually. as an entrepreneur i dont really understand why people dont just live in a car rather than go get a job anyway. jobs make me totally nuts. markets are where its at for me. they are less insane than jobs.

i think the big threat is coming from the price of oil. if that keeps spiking wildly we really are in for a big time extension of the downturn. fortuneately, it would appear to be in lockstep with the stock market right now.

Unless jobs reverse to net gains, how do you expect to see increased earnings? Lagging indicator or not, everything that I see says we will continue to have increased unemployment for months to come, which only serves to diminish spending power. Unemployment can produce more unemployment through a downward deflationary spiral. I ultimately think we'll have inflation, but in the short term deflation could bring down this country further.

The price of oil rising only furthers the case. It will be interesting to look back three months from now and see what actually happened.......

Cost cutting increases profits if it's aggresive. To a point. Much better to wait for sales growth rather than profit growth.

If I may, Please don't confuse diversification with dollar cost averaging. DCA is a concept developed by the insurance and mutual fund industries, the idea being to get people investing on a regular schedule. When "Newbies" begin investing in funds they always naturally recoil when they see the market go down. DCA proves graphically over time that consistent inputs Average out to advantageous share prices in FUNDS. you can bet the fund manager is not trying to trickle purchases into the portfolio, So DCA isn't very effective for single stock purchases unless you plan to hold them for the LONG term like a mutual fund
I have found that we all tend to apply too much emotion and personal interest into investing.

Make money!

and thanks for the great conversations!

Excellent trading ellkell, scaling in to reduce your cost basis is akin to buying stocks at 'wholesale' prices. Do you plan to actively manage the positions or simply hold and wait to sell at 'retail' prices? Do you intend scaling out in a similar fashion?

fahque
i guess i see cash the way i see any stock really. its just the safest one. so dollar cost averaging for me is a bit like diversification.

ligg
in a sense i manage positions by keeping them at the same percentage as i set out in the beginning. in my case thats ten percent per, but thats not what is relevant. whats relevant is i am forced to buy low and sell high in small amounts when maintaining position sizes. over time that translates to gains. thats why i like high beta stocks.