Investment Methods

I’m always on the look out for investment books I haven’t yet read. I pick up a lot of them at garage sales for 25 cents to a $1. One I obtained in that manner is “The Sound Mind Investing Handbook” by Austin Pryor. My copy has a copyright date of 2008.

Much of the information in it is basic personal finance guidance (with a biblical twist). However, I did stumble on a formula for investing that I hadn’t previously encountered, although it has been around since 1088. It is called Value Averaging.

Digging into this formula investment technique (which is similar to dollar cost averaging), led me to the re-discovery of multiple other types of formulas and techniques which are supposed to help us make our money grow.

What are some of the methods used for investing?

Stock picking formulas.

There are stock picking formulas, such as the ‘net net’ stocks strategy used by Warren Buffets mentor, Ben Graham. Graham (and Buffet) are known for their practice of ‘value investing’ – finding stocks that are undervalued.

The net net stocks are those that have a low price relative to the net current asset value. Net current asset value is calculated by subtracting total liabilities from total current assets and then subtracting the value of preferred shares outstanding from that. Divide that value by the number of shares outstanding to get the Net Current Asset Value (NCAV) per share. If the current market price of the stock is just 2/3 (or less) than the NCAV per share, Graham suggested the stock would be a value stock – worth holding over the long term.

There is another called the “Magic Formula” described by Joel Greenblatt in his book “The Little Book that Beats the Market”. This is reportedly also based on value investing principles

Author of Forbes article Why You Should Take Joel Greenblatt’s ‘Magic Formula’ Stocks Seriously, Charles Sizemore thinks it works, others don’t.

Greenblatt maintains a web site Magicformulainvesting.com. For the price of giving up your email id, you can use the stock screener he has built based on this formula.

Technical analysis (chartists).

Some folks don’t really bother to look at the data from the company itself, they instead rely on price movement in the financial markets. They chart out how the prices have moved to try to anticipate what will happen next.

My Dad was one of these in the early 1980’s. This was prior to internet days, so he had stacks and stacks of Wall Street Journals in his closet and did most of the charting by hand (although he was trying to learn the Basic programming language to do his charts on a very early computer.) Some years he made more in the market than he did from his day job, other years, he lost as much as his day job made him.

Non Stock Picking Investment Plans.

Dad was a day trader, but he developed a investment formula for beginners that didn’t rely on individual stock picking. This investment plan is similar in a way to both dollar cost averaging and to Value Averaging types of techniques.

Dollar Cost Averaging

Most of you know about this method of setting aside a certain amount to invest every month. You pick the investment you want to do and the amount you want to invest. Then each period (weekly, monthly, yearly or whatever you choose), you execute the investment. You don’t have to sell and you don’t have to figure out complicated formulas. Over time, in theory, the stock price will go up and down so you will be buying the shares at different prices each period. Also theoretically, this will prevent you from going all in on an investment at the highest market price.

When I retired, I used this method to re-invest the proceeds from my company 401K (that I had rolled into an IRA). It caught me by surprise that the stocks/mutual funds in which I invested while in the 401K could not be transferred in kind to my IRA. Instead, they had to be sold within the 401K and the proceeds reinvested in the IRA. Unfortunately, I was doing this from 2010 through 2013, part of the longest bull run we’ve had in the US recently. So, I was buying my shares at ever increasing prices!

However, while I worked, I also used this method to better advantage. I set up an automatic payroll to investment firm deduction and also set up automated investment instructions at that firm for the money coming in. Over several years, I accumulated many shares of a mutual fund which has since gone up in price.

Value Averaging.

This seems more complicated than dollar cost averaging.

The goal is to stay on track to a final dollar goal by knowing the anticipated value of your pool each period (again, this could be weekly, monthly, yearly, etc).

You pick a long term money goal, then figure out how much you should have at each period. Some periods you invest in your chosen stock or mutual fund (if the value is less than what it should be), other periods you might have to put the money into a money market (such as when the value of your pool is greater than it should be at that time) or even sell some of the chosen stock or mutual fund and move the money back to a money market. This results in you investing more when the market is declining and less as it is growing.

Dad’s investment plan.

Dad’s plan was even more complicated than that.

With this, you pick a set dollar amount to invest each period, divide it in half and put half in your chosen investment, and the other half into a money market or bank account. It has you tracking the average cost of your shares and figuring out how much to buy each period and when to sell (at a profit).

Although we tried diligently to follow this at one point in our lives, we found it a bit too time consuming to really follow it long term. Also, my spouse and I are both buy and hold investors, so the selling part didn’t clique well with us.

What is the best way to invest?

For me, and I suspect for most of us, simplicity is of utmost importance. Investing is not our life. We need and want to do many other things each day. In computer programming and project management we always talked about the KISS! philosophy (Keep it simple, stupid). I firmly believe that most people need a KISS investment plan.

Although stock picking can be fun (I do own individual stocks), and although there are now many helpful sites to help you pick; it still requires time, study, attention and risk tolerance to do so.

I think we should make it as automatic and mindless as possible. Take your emotions out of the mix.

Reinvest your dividends and capital gains; set up automatic payroll deductions and automatic investment programs; use low cost indexed mutual funds; don’t start investing until you are out of debt and have that emergency fund; hang onto the investments you obtain and don’t follow the market swings day to day.

I personally know of a 43 year old guy has done all of the above. He has built a net worth of over a million dollars already.

Remember that I am not an investment professional. Rely on your own good judgment or investment professional to determine your investing plans.


Comments

Investment Methods — 1 Comment

  1. Nice conclusion, I think it can be clever to merge your conclusion with the “Dollar Cost Averaging” method.
    In that way, one can save for the long term and not worry about winning the market, because, with all the respect to the pro’s, most of them can’t win the market for the long run.
    And another important thing to consider is wide diversification. it’s pretty easy to do it with ETF.

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