“The guy with the lowest average cost wins” Bill Miller

“Only losers average losers” Paul Tudor Jones

Ive pondered the above comments by two of the renowned investors which on the surface appear contradictory but both can be reconciled.

Firstly, what are they implying? The first quote simply tells a truism, the lower your entry price the better off you are and the bigger your profits if the share price climbs higher, or realises your valuation. In some ways this is similar to dollar cost averaging and systematically lowering your entry cost over time.

The second quote is a bit more esoteric, especially to value investors. The point, I think, that is being made here is that winning business keep on winning, the strong get stronger, that share price winners keep winning it is momentum, but more than that, I feel. No DCA for PTJ!

Is this simply a value versus growth perspective on the world? Maybe to a small extent. I want to bring in another quote which helps me sort through this. “a 90% loss is a stock that is down 80% and then halves”. The maths is of course correct. However, and this is important, a $100k investment that is down 80% to $20k shows a loss of $80k, if it then halves it losses another $10k. That last loss is not great but its not absolutely destructive $80k, the damage is done before.

Tying all this together, this is what I make of it. Both strategies work but with one critical proviso. If you are into DCA you must be absolutely certain of what risk you are taking on as you continue your buying. For example if you had topped up to 100k when the stock was down 80%, and it halves that it a disaster.

To me it talks to risk. Big disasters can come from DCA into ever deteriorating fundamentals and misjudging risky propositions. The moral of this story, imo, is that DCA be dangerous if risk is not properly assessed, that if you are doing it make sure you are fully understanding of why the market is selling down the stock. I am really only comfortable in DCA for very high-quality companies where the outcome is much more assured.

The ways I track risk is for another (large) note but include, share price volatility, earnings volatility, things happen that I don’t expect or forecasts that rely on volatile variables.

Unfortunately, for me, this lesson comes from experience, if you are into DCA make sure you keep to quality don’t be bloody minded and keep in mind the market could be right