Sowing Seeds is a 4-part series about investing. It’s based on having studied several successful value investors with a strong bias toward treating equities as partial business ownership and not as lottery tickets.
First: Part 1, Market value is imaginary
Then: Part 2, The economy is irrelevant
Finally: Part 3, The second best buzz
Bonus: Part 4, Water your own tree, slowly

“Be fearful when others are greedy. And greedy when others are fearful.”
– Warren Buffett

In other words, when the sky is falling… Buy clouds.

The best buzz about investing is to invest a dollar and see it turn into more. No mystery there, but that, of course, doesn’t always happen, and rarely happens quickly. Something else is almost as exciting, but no one talks about it. What could that be?

What if?

Imagine that you’ve found a few stocks that you have long-term faith in. You’ve watched them regularly, and you’ve seen the pubescent moodiness of the market affect their stock price more than their day-to-day operations have. You think the company is undervalued. You buy some stock.

Then you wait and watch some more. The mood swings in the market continue, the stock goes up, and then goes down, despite positive quarterly announcements. You wait for a downward mood swing in the market, and then take advantage of it. You buy some more.

And then it dawns on you. Once you’re in, you never have to pay market price again. Dollar-cost-averaging is now in play, and you can use it to your advantage. You no longer have to consider a stock’s market price, rather you only need to consider how additional purchases at market will affect your average cost over all purchases.

Bet on the good, hope for the bad

So you look at that solid, long-term investment again. And you wait for some really bad news about one of your company’s competitors. With that bad news, you see that the market reacts to events in the industry more than it does to the realities of the operations of your favorite stock.

You realize then that most investors don’t understand business; they think that stock prices are the prime indicator of business health. So a competitor goes broke, and your stock gets de-valued. And you buy some more.

Then you notice that if a stock price is declining, additional purchases do two things:

1. They reduce your cost; and
2. They reduce your percentage loss.

Although the two are essentially the same thing, the second is the most important factor, because it is a vivid indicator of how much of an increase you need to start making money.

For example, if you buy 100 shares at $10, then lose 20%, your investment is worth $800. If the company is still sound, then it would be foolish to sell. If you have long-term faith in the stock, the other option is to buy more. Another purchase of 100 shares at $8, gives you an investment with a market value of $1,600 and a cost of $1,800. Rather than be 20% down (based on your initial purchase), you are now 11% down (because of dollar-cost-averaging). So when the stock turns around, you’ll start making money sooner.

Best of all, if you can continue making dollar-cost-averaged purchases throughout a downturn. You don’t have to worry about “calling the bottom”; your decreasing cost will do it for you.

The second best buzz

The best buzz in investing obviously comes from positive gains in portfolio market value, even if they are unrealized and therefore imaginary. The second best buzz is reducing your cost during a decreasing trend in the market.

I like to think of it as strengthening the pull on the bow string and increasing the trajectory of the arrow. The second best buzz is buying more.

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