Lowest Average Cost Wins

In a 2004 interview in The Motley Fool, Bruce Greenwald gives an example which drives home the importance of having the patience and discipline to average down in order to optimize performance. Greenwald talks about Paul Sonkin, who, at that time, had averaged about 25% after fees for the previous four and a half years.

Greenwald observed that Sonkin would often make additional pruchases if a stock declined after he bought it. Greenwald looked at Sonkin’s trades and determined that, of the 25% return, fully 22% was from purchases made after the initial purchase. Greenwald also notes that he was looking at the performance of legendary value investor Walter Schloss who averaged 15.3% over five decades. It appeared that much of Schloss’s returns came from the same practice and then selling on the way up. As Bill Miller says, “Lowest average cost wins.”

Takeaways:

  1. Follow-up purchases that lower the cost basis in a stock can have a powerful impact on returns.
  2. Caution! This strategy only works if you have a strong valuation methodology so you can avoid expensive “value traps” and “falling knives”.
  3. This approach requires having a certain self-mastery coupled with a proper orientation on how to think about market prices. For that, study chapter 8 of The Intelligent Investor.
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