Dollar-cost averaging Retreat, business summit packs plenty of power on tap for Denton chamber “We know from experience that eventually the market catches up with value.” — Benjamin Graham, 1955 ast year, the year-end letter we send to our partners had three main themes. First, we reiterated that our strategy had not changed since its inception. We were focused on investing in bargains that would protect our partners from the risks of higher inflation and rising interest rates over the long run. While value-investing bargains were then being shunned by the market in lieu of high-flying momentum stocks, we held true to this course given value-investing strategies are the only proven path to long-term investing success. Second, we introduced a framework of operational, financial and macro catalysts that we believed would help unlock the value within the portfolio during 2016 and beyond. Some of these catalysts had already occurred in late 2015 and early 2016, but the market had not given us credit for those catalysts having played out. For other companies in the portfolio, some catalysts had yet to unfold, as the companies were in the process of executing on our recommendations. Even so, there were clear, positive pivot points in the companies’ prospects that underpinned the massive upside we saw in the intrinsic value estimates we shared with you. Finally, we encouraged our partners to exploit the bargains we were seeing. The price/value gap had just stretched too far. Wonderful companies became absurdly undervalued. We hoped each partner would continue to dollar-cost average into the bargains we owned, not knowing exactly when the values would regain favor, but understanding the combination of value and catalysts simply made it inevitable that the market eventually would catch up. Those who exploited the bargains along the way have definitely been rewarded. Let’s explore this dollarcost averaging theme a bit
Jonathon FITE | COMMENTARY
further. Suppose you just got a bonus, or your business is throwing off lots of excess cash, and now you have $6,000 to invest. Instead of investing the entire amount all at once, you decide to use dollar-cost averaging and spread the investment out over several months by investing $1,000 a month for the next six months. This averages the price over the period, so some months you may buy fewer shares, each at a higher price, and some months you may buy more shares, each at a lower price. If the market is lower this month, you may lose money on the shares you bought last month, but this month you receive more shares, which, in the future, will help offset any losses. With dollar-cost averaging, you are able to take advantage of any low during these six months, guaranteeing you to invest at the very bottom because when it comes you are simply doing what you do every month. Once the market begins to appreciate the value you own, which it is likely to do in the long term, you’ll be ahead. The best part is that you didn’t have to predict what the market was going to do each month. It was just automatic. If you tried to forecast the bottom, you could miss it altogether and risk putting your entire $6,000 in at a bad time. Peter Lynch, the famous Magellan Fund manager, said, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.” Market corrections often cause investors to abandon their investment plan, moving out of stocks with the intention of moving back in when things seem better —
often to disastrous results. A study by the Davis Advisors group evaluated 20-year market returns of investors who remained invested over the entire period (1994-2013) versus those who missed just the best 10, 30, 60 or 90 days. The patient investor who remained invested during the entire 20-year period received the highest average annualized return of 9.2 percent per year. The investor who missed the best 10 days had their returns cut in half. If you had missed the 30 best days, your returns were flat over this period. Amazingly, had you missed the best 60 or 90 days, your returns would have been negative for the period. The best approach to not getting scared out of future gains and exploiting declines along the way is to steadily dollar-cost average in over time. But what about the postelection rally? Yes, markets have rallied since the election, but we expect plenty of volatility to remain with Donald Trump in office. We have seen how a tweet from the president-elect can create market waves. As policies get implemented or others delayed, we will be sure to exploit the shortterm fluctuations in the market that result. In addition, given Trump’s policy proposals to cut taxes and spend heavily, our themes of rising inflation expectations and higher interest rates look like they will continue to permeate for years to come. A value-laden portfolio should help you be positioned for this reality, and as new opportunities come your way or existing holdings pull back, new dollar-cost average contributions can be put to work. Have a merry Christmas and a happy, healthy and wealthy new year. JONATHON FITE is a managing partner of KMF Investments, a Texas-based hedge fund. Jonathon is a lecturer with the College of Business at the University of North Texas. This column is provided for general interest only and should not be construed as a solicitation or as personal investment advice. Comments may be sent to email@KMFInvestments. com.
n preparation for our new program year, which will begin April 1, the Denton Chamber of Commerce board recently signed off on priority topics for our planning retreat agenda. The retreat is scheduled for Jan. 27 at Hilton Garden Inn Denton. The new program year coincides with the next fiveyear cycle for our strategic plan. We’re especially excited about what we hope will be a signature event, the Thrive Denton Business Summit. The summit will feature three major components with three corresponding tracks, a keynote address, a business expo and a closing reception. We hope to provide existing businesses, aspiring businesses and working professionals with the tools and support to retain a talented workforce, start new businesses and expand existing business in Denton. The keynote address will be delivered by Ray Perryman, a Texas-based econo-
Chuck CARPENTER | COMMENTARY
mist who has specialized in analysis and research for more than 30 years. The Thrive Denton Business Summit will held Friday, May 19, at the University Union on the University of North Texas campus. Another program priority is our Denton Means Business 5K, scheduled for Saturday, April 8, at Apogee Stadium. A pilot version of the event proved popular not only for runners but supporting sponsors. Thanks to Hank Dickenson and the UNT athletic department, we were able to share net proceeds with the Mayor’s
Summer Youth Jobs Program. Municipal elections will be held May 6, so we’ll be identifying pertinent subjects to include in our candidate questionnaire. We post responses from all participating candidates on the chamber website prior to the start of early voting. We’ll be implementing a standing priority initiative Feb. 28 and March 1 when we help coordinate Denton County Days in Austin. This event has been held in conjunction with every regular session of the Texas Legislature since 1987. Nearly 200 North Texas business leaders and local government officials registered to participate in 2015. Call the chamber office at 940-382-9693 for more details on any of these events and projects. CHUCK CARPENTER is president of the Denton Chamber of Commerce. He can be reached at dcoc@ dentonchamber.org.
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