One of the dilemmas long term investors may face is, when buying for first time, how much worth of stocks one should buy in a given company. This question is from long term perspective and not for trading approaches. There are few different schools of thought on this issue. In my view, each of the thoughts, methods, and approach is valid depending upon investor’s objective.

One thought says buy at once in one go, because if one has spent time following it, researching it, then why wait for other occasions. The fact that an investor has questions (or doubt), that means this individual has doubts, or not confident about it. One is questioning own analysis. It could be lack of proper understanding of the stock, or lack of research.

• In my view, this approach is suited for investor’s who understand aspects like mis-pricing, or some kind of arbitrage, or deep value, etc. Here, investors are confident that the stock is undervalued. Once the value is reached or increased beyond value, they cash-in their profits.

Another thought says, to use cost averaging over a period of time. Here, investors use an automatic fixed investment amount, at fixed frequency, and over a fixed period of time. For example, an investor withdraws a fixed Rs. 2000 from his checking/savings account and invests it every month continuously for one year or more. In this process the key aspect is, there is no thought process involved. After the investment vehicle is selected, there is no thinking or analysis involved. It is purely mechanical. The advantage is that one does not need to worry for investing every month and a systematic process is being set for his investments. It allows smaller amounts for investments. In many investing vehicles (e.g. mutual funds), the investing/transaction cost can be controlled.

• In my view, depending upon the type of investing vehicle, the disadvantage is that the price keeps fluctuating. Investors will not know at what price the investment is being made or if there has been any fundamental change that is causing price fluctuations. It is likely that an investor may be investing at over valued price point.
• I believe this approach is best suited for fixed income vehicles like CDs, fixed bonds, government guaranteed certificates, etc. Here one knows the fixed value and need not worry about price fluctuations.

Still another thought says, to buy in blocks of one half (50%), and/or one third (33%), and/or one fourth (25%). This is different than cost averaging, in a sense that, it involves continuous evaluations. If the company is performing well, then one adds to existing position. If company is doing badly, then one limits the exposure and does not add more. Furthermore, there is flexibility in time frame and actual amount for addition. It can be few months or few years. It is generally thought that this approach is not that beneficial because over time the stock’s price or value will balance out or average out any minor discrepancies.

• This approach is more suited for investors who want to remain part of the business or company for more than 10years or so. Here the investor wants to grow with business and not just cash out once there is certain level of profitability.

In my investment process, for short-term, I use fixed systematic investments in CDs, fixed bonds, and government certificates. All these also act as safe and non volatile investments. For my long term portfolio, I buy stocks that I want invest for long term and grow with the company. I buy stocks in blocks of one third over a period of time. I initiate a position which helps me follow the company. It also helps me make sure; I am not making a mistake. It may take me one year, two years, or more for second or third installments. Typically, I look at 15-20 companies before I can come up with one potential company for my portfolio.

I do not use the first method of buying at once, primarily, because I am not good at judging the value of the company. If I do, then it keeps me awake at night.

What methods do you use?

stock buying