The Prudent Investor


Buying Methodology, Part 2
March 8, 2007, 7:59 am
Filed under: Update

The idea of INVEST% (which came to me through MoneyPaper) is very simple, and with the modification I added to it for multiple companies (which I will explain at a later time), I have found that it works very well. Simply put, when the company is down, buy more, when it is up, buy less. By attaching a predetermined calculation to it, emotional investing is removed from the mix, and we have all seen emotional investing destroy portfolios.

In this scenario I am planning to make a $100 purchase each month. Since I am required to purchase whole shares, seldom (if ever) will the purchase actually come to $100, but I will round the number of shares either up or down to accommodate. However, if the stock’s price is high relative to what it has been over the past year, then I will purchase less, if it is low relative to what it has been over the past year, then I will buy more. The actual amount could vary by 50%, so if the price is at its 52 week high, then I will make a $50 purchase, if it is at its 52 week low then I will make a $150 purchase.

The formula for this is:

((1 – ((Current Price – 52WeekLow) / ( 52WeekHigh – 52WeekLow))) + 0.5).

Solving for SJW at this point is time we have:

((1 – ((36.06 – 21.16) / (45.33 – 21.16))) + 0.5), or

((1 – ((14.90) / (24.17))) + 0.5), or

1 – .616 + 0.5,

or 0.88.

This tells me to make a $88 purchase. Since I cannot purchase partial shares, I should round things to the nearest whole share, which would be 2 shares.

Now that I know how much will be used in the purchase, the next thing to do is to decide when to make that purchase. As noted, I like to take the timing element out of things, so I have always made my Dividend Reinvestment Program purchases on the 7th of the month. There’s absolutely nothing special about that date, it was a random number I selected simply to make things easier.

All of this is a guide to making a decision and can be overridden at any point, if there is sufficient reason. So the “blind aware” blind investing indicates that we are using a predetermined calculation to guide us, not make the final decision. I am pretty certain that I will be sticking to this formula, though I will always have freedom to change my mind.

This means that a purchase should have been made yesterday, and indeed this was done at lunch. I did make a mistake, however, and purchased 3 shares instead of 2 shares, but that is of little consequence.

I have put together a Google spreadsheet which is located at http://tinyurl.com/2q2hsd, and a link to it can be found to the left of this text, so tracking the progress of the portfolio will be easy.

Next week I begin the journey of deciding the next company to be added to the Prudent Investor portfolio.

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