TaketheFifth 75ing three months when its stoc kprice on the purchase dates was
$80, $120, and $100, respectively. The average price during that pe-
riod was $100 (80 120 100 divided by 3), but your average cost
would have been $97 (you would have acquired 2.5 shares at $80,
1.66 shares at $120, and 2 shares at $100, and so you would have
invested $600 and acquired 6.16 shares). This strategy can beat Mr.
Market by substantial margins when used over long periods of time.
Staying the course is prudent only if there is a basis for deciding
that price is less than value. Adopting the mind-set developed in this
book is important in making that kind of judgment. Monitoring the
relationship of the DRIP’s price to its value using this mind-set is
prudent. Beware, however, that dollar-cost averaging works to reduce
your average purchase price only if you participate during Mr. Mar-
ket’s gloomy moods. It defeats the goal of defeating Mr. Market to
try to time the market by periodically terminating and later resuming
participation.
For all investors (those in index or mutual funds, DRIPs, or in-
dividual stocks) the key point is to develop a mind-set that attends
to the price-value distinction. You can achieve this without neces-
sarily doing all the detailed computations or extensive research dis-
cussed in this book, but it is imperative to embrace the mind-set
these tools reflect as a way to understand business analysis and in-
telligent investing. There are no free rides any more than there are
free lunches.
Diversification of Stock Investments
Unlike modern finance theory, investment knitting does not pre-
scribe a particular diversification of a stoc kportfolio. It may result
in diversification, but not as a requirement. Ending up with a con-
centrated portfolio is sometimes perfectly fine. As Gerald Loeb
noted, most of the really great fortunes were made by concentra-
tion.^5 If you thin kabout Johnson & Johnson or Papa John’s Pizza
and find that the prices at which they can be bought are very low
compared to your reasonable valuation, buying only those two stocks
may be all you need or prudently should do.
You should certainly avoid starting a portfolio on day one with a
dozen diversified stocks. It is almost certain that you will not be able
to find that number of stocks on a single day that are offered at
prices substantially lower than their values. Over long periods of
time, some degree of diversification will probably occur, and it is not