An investing technique for the finfluencers
Twenty-something: “Dad, I’m going to trade currencies”
Father: “What do you know about it?”
Twenty-something: “There’s a guy on Youtube, and he trades currencies, bitcoin, and the S&P500, using charts and technical analysis, and makes heaps. And he drives a Lamborghini.”
Father: “Do you have to subscribe to get his ‘secret’ trading signals”
Twenty-something: “Yeah, why?”
Father: “that’s how he makes heaps”
Technical analysis and charting is just dumb
Who doesn’t want to make money with little or no effort? And how much easier would it be to eschew the business analysis and mathematics of investing and wait for the share price to cross an imaginary support or resistance line or a blue or green moving average line to trade your way to financial freedom?
If you are my age, you have learned, possibly the hard way, that charting and technical analysis are rubbish. Back in the 1990s at BT and then in the early 2000s, I was privy to and built algorithms that sought to systemise and test the robustness (a statistical term) of traditional technical analysis techniques and signals. They were no better than random.
Of course, you will find a few people at this point, who ‘ark’ up and say it works for them. The vast majority of that cohort, however, don’t realise they have just been lucky.
If you had 10,000 monkeys flipping coins, with heads winning $100 and tails losing $100, you would eventually have a monkey that becomes very rich because it flipped 50 or even 150 heads in a row. That’s not genius, that’s just the consequence of a normal distribution of outcomes. The monkey is playing a game entirely controlled by probabilities and measured and displayed with statistics.
The monkey’s luck will eventually run out, but before that happens, the genius monkey starts a YouTube channel explaining to its subscribers how to ‘flip your way to financial freedom’. The monkey is assured financial success thanks to social media – history’s quickest version of word-of-mouth. With its revenue from subscriptions and Google ad revenue, the monkey buys a Lamborghini and a Ferrari and shows off the benefits of coin-flipping success, garnering even more followers and revenue.
This model is as old as gambling itself. It was around when your great-grandparents were alive, when your grandparents started saving, and your parents were putting you through school.
Sadly, each generation must lose money to the same errors of financial judgement as the generations that came before them. There needs to be a central repository of lived experience that all generations can tap into to avoid repeating the mistakes of the past and advance humankind faster.
But fret not.
The boring road to riches
If you are young, there are ways to achieve financial success and freedom from investing. It will take a bit longer than you may have initially estimated and hoped, and it is frightfully boring – but that means you will have more time, for example, to start and build a real business, or breed some monkeys!
I have explained a simple one to my adult kids, and they’ve seen it in action. I have also mentioned it to the younger guys on the team here at Montgomery. I call it dollar crash averaging.
You may have heard of dollar cost averaging. Dollar cost averaging is the regular practice of investing a fixed dollar amount in a company’s shares or in the stock market index, regardless of the share price. Let’s say you elect to invest a fixed $500 every month. When the market is up, your $500 will buy fewer shares, but when the market is down, your money will buy more shares.
If the market rises strongly for a long period, you would better off investing as much as you can at the commencement of the period but in the absence of having a huge amount of money and acknowledging we don’t know when the market will go up or down (we don’t!), the dollar cost averaging strategy can lower your average cost per share compared to what you would have paid if you’d bought all your shares at once when they were more expensive than the average.
Dollar crash averaging
But I like a strategy that is slightly different. Dollar crash averaging seeks to achieve an even better outcome by being contrarian.
You may have heard it said, ‘buy when there’s blood in the streets’, or ‘be greedy when others are fearful and fearful when others are greedy’. Dollar crash averaging seeks to do enforce a disciplined approach to abiding by that sentiment.
It really is this simple; Start with the dollar cost averaging technique today, and continue to contribute to your investment a fixed amount, every month or quarter as you have determined. Then, every time the market falls 10 per cent you are going to make an additional investment. You are also going to apply a version of something called the Martingale system. If the market falls 10 per cent from a previous high you will invest, for example, $500. If the market falls another 10 per cent from where you last invested, you will make another investment of greater than $500. If you could double it to $1000 that would be great. And if the market falls another 10 per cent, you will invest more than the second investment.
Eventually, the market will recover. You’ll see.
Let me warn you; it’s going to feel hard to make these investments. When the market is falling, most people zip up their wallets. The last time I saw this was in 2022, and before that in 2020, when COVID-19 hit. Your Youtube and TikTok ‘finfluencers’ will tell you the world will end, the markets are about to crash profoundly, and they may never recover. Don’t worry, these Cassandras have always existed and always will.
Ignore them; just keep going, especially if you have picked the S&P 500 index or shares of very high-quality domestic and global companies.
You want to buy stocks the way you buy groceries. You buy more when they are cheap and less when they are expensive. In the stock market, people tend to do the opposite; they buy more after prices have gone up and less when prices go down. We see it all the time. Dollar crash averaging forces you to do the right thing, buying more when prices are down and less when prices are high.
I love raspberries. However, I don’t buy any when they are $9.99 a punnet. Today, just before I wrote this post, raspberries at the Martin Place IGA in Sydney were $2.99 per punnet. That’s the time to be buying raspberries. Buy the shares of high-quality companies the same way.
Eventually, markets recover. It could take a year or two or even three, but markets always have and always will. They have survived and recovered after wars, financial crises, pandemics, terrorist attacks and more. The future is destined to contain events that will bring markets to their knees again, but they will recover again too. So just keep going, Dollar Cost and Dollar Crash Averaging.
After 50 years of doing this, you will be so profoundly successful that you could launch a YouTube subscription service explaining how to do it.
This blog post, however, is completely free.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
