Have been talking a lot about investing in the last few days. That’s because while the market continues to rebound from March lows.

Oh, don’t think that anyone is the kind of investor that can go error free. Even the best investors can make mistakes, big money losing mistakes. Kraft Heinz has lost Warren Buffett’s company Berkshire Hathaway billions of dollars in the short time it owned the company. For him, there’s nothing to do except take it on the chin and wait, unfortunately.

For the rest of us mortals, it’s important to have management strategies when a trade gets cut in half, or worse. For illustration purposes, let’s take a look at the following chart of Bed Bath and Beyond, arguably one of the best retailers in the last two decades, and how it traded at the end of last year.

This is the last year of daily prices. The [D] signifies dividend payments equating to another 5.05% of added value. Let’s say you bought in at $15 per share in May, thinking that the stock, long-term, is good for a double, but by mid-August are scratching your head with a 50% loss.

What do you do?

Well, if you believe in the longevity of the underlying company, then it is typically a good strategy to dollar cost average, investing the same amount of money at the new lower price as you did originally. So, if you bought 1,000 shares at $15.00 per share, investing $15,000, you should then buy 2,000 shares at $7.50 per share, investing the same dollar amount — if you can. This brings your average price down to $10, which as the chart suggests, would mean today you’re sitting on a 40% profit.

40% Gain in less than 7 months.

This was obvious in hindsight, and while I’ve done this hundreds of times with investors all over the world, it doesn’t get any easier and won’t be next time the market drops 30%.

More Examples…

As the S&P 500 continues to climb back to and above its all-time highs, I start to think about portfolio management — one of the most important aspects of investing. Anytime you find that a company can produce above average profit on investment (“high yield“), you should consider owning it, regardless of whether you already own it at a different price, especially if the earnings are consistent and can remain that way into the future.

In most cases portfolio management is simply building a base of 20 to 30 great stocks, bought at the right value, and letting them ride long-term. However, I’m a big advocate for dollar cost averaging in the cases when stock is bought in a good company but decreases in price over the short term. Here are three examples to illustrate the point.

If you estimated the value of the company in 2008 at $12/share (like Warren Buffett did), you probably bought it all day long for $4. What happens if the stock dropped to $1 and you still valued the company at $12? Would you sell or buy more? This is the hardest question for investors of all experience levels to answer. Yet, between 2008 to 2012 the ride of PIR was remarkable and dollar cost averaging would have produce solid results.

Price on September 19, 2008: $4.43
Shares on Initial $10k Investment: 2,250
Price on January 9, 2009: $0.57
Shares on New $10k Investment: 17,500
Total Investment: $20,000
Total Shares: 19,750

Price on January 3, 2013: $20.71
Total Account Value: $409,000
Performance Rate: 1,945% gain

Another, more recent example is that of Cliffs Natural Resources (CLF). At the start of 2015, CLF was traded at $7.03 a share. By the start of 2016, the stock was down to $1.61.

Price on January 2, 2015: $7.03
Shares on Initial $10k Investment: 1,422
Price on January 8, 2016: $1.61
Shares on New $10k Investment: 6,211
Total Investment: $20,000
Total Shares: 7,633

Price on December 1, 2016: $8.78
Total Account Value: $67,019
Performance Rate: 235% gain

Another recent example is Petrobras (PBR) the Brazilian oil company. At the end of 2014, PBR was traded at $9.72 a share. By the end of 2015, the stock was down to $4.74.

Price on December 3, 2014: $9.72
Shares on Initial $10k Investment: 1,028
Price on December 1, 2015: $4.74
Shares on New $10k Investment: 2,118
Total Investment: $20,000
Total Shares: 3,146

Price on December 1, 2016: $10.87
Total Account Value: $34,204
Performance Rate: 71% gain

Heading into 2021

Whether it happens next year or the year after, the short term crash the US markets experienced in the beginning of Covid is nothing compared to what could happen sooner rather than later. Of course, that would be caused by the trickle down affect of continued lockdown across the US or re-lockdown procedures that could happen in Q4. The idea here is that currently, the market is dislocated from the economy. That cannot last forever.

We’ll see.

Notes from the journey through existence. 20+ years analyzing and forecasting complex assets at the highest level of the economy.