Systematic Investing Group

[BowlerBob]

Clifford,

Do you know anything about "Zero Cost Averaging"? I have read an article in Stocks & Commodities magazine by Thomas Bulkowski and another (earlier, 1998) article by Terrance Quinn & Kristen Quinn.

They describe two basic techniques to accomplish their goal of investing in a particular stock until it reaches the goal of being able to sell enough shares to return the original purchase costs to the investor, but still retain numerous shares of the stock, where the cost-basis would be $0.00. The idea is to accumulate enough "free" shares to satisfy that portion of a diversified portfolio, and then do the same procedure on another stock, and another, and another.

The first technique is to figure out ahead of time how many shares you must purchase so that when the share price gets to your target, you sell a portion, but keep the "freebies".

Example: Buy 500 share of XYZ at $20 per share. This costs $10,000. When the share price of XYZ reaches $25, the investor sells 400 shares. $400 X $25 = $10,000, with 100 shares left over.

Since not all stocks go directly to their "target" price, the second technique is for stocks that "oscillate". You are wanting to hold a position in ZYX for your portfolio and it is priced at $12. You decide that you will increase the number of shares by 50% when the price falls 25% and you will sell 50% of the original number of shares when the price rises 25% from this initial value. 25% of $12 is $3,so you are looking at $3 increments. You buy 400 shares at $12 and the price falls to $9 (-25%), so you buy another 200 shares. Then the price rises back to $12 and you sell 200 of the 600 shares you hold. You now have 400 shares again.

If the price rises another $3 to $15, you sell 300 shares for $4500 and you have 100 "free" shares plus $300 extra. But if the price falls again to $9, you buy another 200 shares, for a total of 600 shares. When price goes back to $12, you sell 500 shares and have 100 shares at zero cost. This does not include commissions or taxes, but gives an idea of the procedure.

To read what Bulkowski has written on the subject, simply Google "Zero Cost Averaging" and follow the links. He has quite a few articles at the insert-text-here.

I believe this thinking fits most of the investors "mind set" who follow this board and Tom's AIM board. I have not seen this discussed anywhere until I read the articles in "S&C".

Regards,

Bob