How to Prevent Buying Too Early

By dave_7 from Lethbridge, Canada (Empty bus) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons

Sleep per Day: (Target) 7h30m / day (Actual) 7h19m  / day (61 day average)

In “Only Investing in Things You Can Control“, I mentioned that “I’m going with buying US Wide Moat Stocks with my lump sums of money. I can control the valuation and quality of the company stocks I buy, which can offset the diversification risk.”

But how do I solve the dilemma of not having enough money to be comfortably diversified? [1] After all, the biggest thing I want to ensure is to minimize regret so that I can stay the course, so I don’t want to end up kicking myself for buying way too early during a potential bear market.

After all, I don’t want to be the guy “who was left on the sidelines of the booming September 1929 stock market highs, then sat on cash, and plunged in only after shares were 19 percent lower by April 1930. When stocks reached the time of the eventual bottom in June 1932, that investor had lost 83 percent.

So my plan involves two components:

  • Only invest when the number of available stocks [2] is 1.5x (16 – no. of wide moat stocks held) [3] or 24, whichever is smaller.
  • If number of available stocks is satisfied and available cash [4] on hand can afford it, buy 1 stock / month until I have 16 stocks. If available cash on hand can’t afford it, leverage up to the point that I can afford 16 stocks over 16 months. Max stock commission I’m willing to pay per purchase is 1.5% [5].

By the time I have 16 stocks, I’d just invest in whatever is the best stock according to a combination of quantitative factors whenever I have the money. This means I’m willing to repeat purchase certain stocks.

[Notes]

[1] I’m comfortable with at least 16 stocks, since according to Joel Greenblatt it reduces nonmarket risk by 93%. This is important considering I’m investing in a formulaic way, which works well on average, thus requiring adequate diversification to allow me to reap the benefits of a good investment strategy while minimizing the probability of being wiped out due to bad luck.

[2] Available stocks is defined as wide moat stocks that are available at the right price based on my fair value estimate.

[3] 1.5x gives me a margin of safety in the event that when I start the 16 month long journey of 1 stock purchase / month, there will still be 16 available stocks left by the time I finish the 16 month long journey.

[4] Available cash is dependent on net worth * (((US Shiller P/E Actual / US Shiller P/E Mean) – 1) * 100). The rationale is detailed here.

[5] 1.5% stock commission implies a 1% expense ratio over 3 years. The rationale is detailed here.

[Disclaimer]

Not advice. No offer. Do not rely. May lose value. Risky. Conflicts hidden/obscured. (Borrowed from Terrence Yang‘s Disclaimer on Quora)

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