The wrong way of investing

Investing in risky vehicles about which you have minimal knowledge is a pathway to losses.  My story may be familiar to some.  In the early 90s, I was introduced to commodities investing by a popular investor in the commodities market.  The concept of leveraged investing was very enticing, and I decided to try out the techniques that I learned from a popular course.  As you can guess, things did not turn out so well, and I lost a lot of money.  My mistakes involved a lack of discipline, a lack of knowledge, and the lack of money management.  Investing in commodities can only be accomplished successfully by judicious use of the aforementioned techniques.  I have not delved into commodities investing again since that time, however I do believe that it can be a lucrative way of investing.  I happen to be much more familiar and comfortable with investing in stocks.

Investing in stocks

Investing in stocks is perhaps the most popular way that physicians invest their money.  I feel like we as physicians are drawn to stock investing or paper investing because it is a way of investing that is fairly easy to do.  It really is as simple as opening an online account and funding it.  It also fits into our busy timeframe for the most part.  Other investments such as real estate investing or investing in a small business are much more time consuming.  I’ve always had a fondness for stock investing, and I no longer invest in mutual funds, as I mentioned in my previous article Why Mutual Funds are bad.

Value investing

One of the best experiences that I have had was when I was doing some early investing in stocks during the year 2005.  At that time, I invested in five different stocks utilizing a technique called value investing. By using this technique, I was able to achieve the lowest cost basis for each individual stock, and I achieved a nice rate of return during the time in which I utilized this technique. It really is a nice technique that I’ve used over the years and works even better than dollar cost averaging. I think it’s a great technique to utilize as a low risk method for individual stock investing.

For example, say that you are investing with $50,000.  Perhaps you might want to break this up into $10,000 increments and invest each increment in a particular stock.  So, now you are investing in 5 different stocks, and each total investment will be $10,000.  In utilizing the technique of value investing, you would invest a value of $1000 each month over a 10 month period of time.

The first month you invest $1000.00 in stock ABC that is trading at $25.00.   You now own 40 shares of ABC stock.  You then wait for a month.  At the beginning of the second month, you check the stock price of ABC and perhaps you see that it is trading at $22.50.  Now, what you want is for the total value of your investment to increase by the set amount of $1000.00.   So, then your total value would be $2000.00 at the beginning of your second month of investing in this stock.  Since ABC stock is now trading at $22.50, your current value at the start of the second month is 40 shares x 22.50 (which is $900.00).  In order to increase your total value to $2000, you will need to buy enough shares to equal $1,100.00 (2000 – 900 = 1100).  So, you divide $1,100 by the current price $22.50, and you get about 49 shares.  So, now you buy 49 shares of stock at $22.50.  The third month comes along.  Let’s say the share price of ABC has now moved up to $27.00.  You now want to buy enough shares to increase your total value to $3000.00.  Your current value is 89 shares (40 shares +49shares) x $27.00 = $2,403.00.  So, now you need to add $597 in value to get to your $3000 total.  Divide 597 by the share price of $27, and you will need to buy about 22 shares.  You continue to do this monthly until you’ve invested your $10,000.  By using this technique you will have achieved a nice low cost basis. Overall, value average investing has been proven to have a better rate of return than dollar cost averaging (which is simply investing a set amount of money each month).

This is been a great technique that I’ve utilized over several years of stock investing, and I hope that it proves to be valuable to you as well.  Until next time, here’s to your wealth.

Disclaimer