Losers Average Losers
Dan Ferris, Editor of a newsletter titled “Extreme Value”, writes:
“Amazon.com’s initial public offering was 3 million shares at a price of $18 each (presplit). Bill Miller, manager of the Legg Mason Value Trust, bought Amazon’s stock at the IPO, back in May 1997. Miller sold that first position, later saying it was, “the dumbest thing we ever did.” Miller bought Amazon again at $80 a share in 1999. Amazon’s stock price fell apart, just like every other Internet stock. Miller responded by doing the only sensible thing he could do. He bought more. A lot more. As he told Fortune magazine, “We started [buying] again in mid-2000 when the stock was in the $40s, and then we bought it all the way down. Our buying increased as the stock fell. If the stock was $35, we’d buy 50,000 shares; at $25, we’d buy 150,000 shares; and at $14 we’d buy 300,000 to 400,000 shares.” Miller says he finished buying “between $7 and $8.” Miller’s buying strategy goes by a name you might be familiar with, dollar cost averaging. Dollar cost averaging is when you spend the same dollar amount no matter what the stock price is. If you spent $700 for 100 shares last December, that same $700 will buy you about 139 shares at today’s prices. If you bought $10,000 worth back then, $10,000 would buy you 39% more shares today, and so on. Today, Amazon is around $37 a share. Miller’s average cost for the stock is around $19.69 per share. He paid as much as $82 for some of his shares, and he’s still up 88% with the stock 55% below his initial entry price. From his highest price to his lowest price, the stock fell 91%! And he’s still up 88%! I doubt many people can say that they’ve ever made an 88% profit from a stock that fell 91% while they were holding it. Brilliant as Miller’s strategy is… the “trend is your friend” crowd reacts to Bill Miller’s behavior like an ape in front of an obelisk. Buying stocks that are falling in price? Throwing good money after bad? It’s sacrilege!”
How many pure play dot-com survivors were there? 5 or 6 big ones? How many 100’s of companies would you have lost all of your money if you were dollar cost averaging? Trend followers refer to “dollar cost averaging” as “losers average losers”.
