Every investor's goal is to buy stock at just the right moment. But the reality is this almost never happens. And waiting for that “perfect moment” often means investors miss out on owning a great company.
I'm not suggesting that we should all go out and just buy whenever the mood strikes us. That's not likely to be a successful strategy over the long term. But since stock direction is often unpredictable (at best) I do suggest that investors always average into positions (buy in tranches).
Doing so helps to spread out the risk of buying at the wrong moment. And it cures the paralysis that some feel while waiting for the perfect entry point. This could be particularly helpful right now, when the market is trading at all-time highs.
Remember, unless you purchased a stock at the lowest point in its history then you've missed out on some potential gains. A lot of money is still made by the vast majority of investors who buy great companies at less-than-perfect prices.
The Advisory Board Company (NASDAQ:ABCO) provides a good case study. I recommended Small Cap Investor PRO subscribers buy a first tranche of ABCO in June at $47.85, just before a nice rally in the shares. Unfortunately that run was short lived. After posting earnings results that came up shy of expectations, ABCO fell sharply and we were down on the position.
But it was still a great company. The stock price was just lower.
Patience and conviction in ABCO led me to recommend a second tranche on August 16th at $41.83. That turned out to be a really good time to buy, and the stock went on to rally to a 52-week high. The average gain on the position just before booking the gain was nearly 15%, and the second tranche nearly doubled the total return.
Here is the chart I sent to subscribers detailing the trade as it was progressing.
The takeaway message here is that averaging into the position, being patient and having conviction in the company led to success, despite a less-than-perfect initial entry point on the stock.
Of course you'll want to have the right stocks to begin with. And for that, you’ll need to do your own research, speak with your advisor or generate ideas from advisory services like Small Cap Investor PRO.
The strategy is continuing to work for us. We’re now approaching a “double” in a portfolio stock that we averaged into, although in this particular case the second tranche was purchased at a higher price because the story was getting better and better.
There is very little mystery to this strategy. It’s easy to execute and, I believe, leads to better performing investments over the long term. And like I said earlier, it will likely help you get into stocks that you might otherwise avoid if you’re waiting for that elusive “perfect” moment.
Tyler Laundon, MBA
Editor's Note: Just last week I recommended Small Cap Investor PRO subscribers add a second tranche of a technology company that is rising along with its industry peers. If you would like to learn more about this opportunity, consider taking a free, 30-day trial to our small-cap growth stock service, Small Cap Investor PRO. Click here to learn more.