Episode #4 - The Cal Ripken Jr. method of investing
If you don't get the reference, I'll fill you in.
Intro:
Cal Ripken Jr. overtook Lou Gehrig for the most consecutive games played by any Major League Baseball player. For many Gehrig’s 2,130 games in a row was viewed as unbeatable (great family story about Gehrig for another letter). Consistency sometimes is mistaken for productivity (you can show up to work every day, but still be a mediocre performer). Ripken managed to achieve both: his accolades and feats were not limited to the number of games he played in a row, he was an all-star. The coach only let’s you play so many games in a row because you’re good enough.
(Thank you to Sporting News for this image, original article accessible here.)
However, in the world of investing, consistency alone will suffice.
Welcome back to another episode of Winnings. If you’re joining for the first time - click here to lock in for the rest of these weekly notes. Last week I introduced the idea of following and investing in a stock index through the lens of the all powerful S&P 500 (go ahead, check how it’s doing).
Investing in the market has many pieces but I believe it can be summarized into two parts:
What do you invest in?
When do you invest in it?
Last week the focus was on #1 and this week I’ll focus on #2 through the lens of dollar cost averaging herein DCA - the Iron Man method of investing.
Background:
As you can imagine, the most brilliant thing an investor can do is to time the market. Timing the market involves the two items referenced above: knowing what stocks to buy and when to buy/sell those stocks. Imagine, back to our friends at Zoom, Netflix, or even Carnival Cruise Line: if you knew when to buy them (typically at a low price) and then when to sell them (ideally a high price) you’d be SET. Does that make sense?
However, while it might make sense, how do you ever know with certitude that a stock, or an index for that matter, has hit the bottom (for when to buy) and hit the top (for when to sell)? Typically there are two ways someone can play the market this way with confidence: 1) some sort of insider information (kind of makes it obvious why that’s illegal) or 2) you have an itch or a feeling that a company will do well. If you saw flights being cancelled to China a couple of months ago and then you thought: Hey, talking without flying could be great and I love using Zoom to do this, I should buy some shares!
Now that you have the Zoom shares, how do you know when to sell them? Maybe you should buy more? So. Many. Possibilities. So even if you get the buy idea, when do you sell?
As I’ve mentioned, following this newsletter is not to get my prescient stock picks, rather learn some language and methodology that can help you invest for the long term and that brings us back to DCA.
A brief explanation of this method thanks to Investopedia.com:
Dollar-cost averaging refers to the practice of dividing an investment of an equity up into multiple smaller investments of equal amounts, spaced out over regular intervals.
The goal of dollar-cost averaging is to reduce the overall impact of volatility on the price of the target asset; as the price will likely vary each time one of the periodic investments is made, the investment is not as highly subject to volatility.
Dollar-cost averaging aims to avoid making the mistake of making one lump-sum investment that is poorly timed with regard to asset pricing.
In laymen’s terms, instead of investing all of your money at one shot to try and time the market (which we presume you can’t do), you break it up into smaller chunks of investments over a longer time horizon. For example, some months your $500 will get you 1 share and other months your $500 will get you 5 shares, but on the whole you follow the Iron Man method of investing - just like Cal Ripken Jr. - consistency day in and day out will win you the day because you are being consistent.
*Disclaimer* If you apply this method to a single stock that keeps going down and ends up never going back up, you will be pouring money into a never ending pit. Another reason to avoid single stocks.
Who taught me this idea?
One of my main teachers in the world of investing is Ric Edelman - his introductory book on investing has served as a sort of bible on the topics I share here. He gives a deep dive into this investing method and encourages those interested in long term financial health to adopt it as a methodology.
Additionally, Suze Orman, a renowned personal finance guru, has recently shared the power of DCA here and how she believes it is the way to create wealth right now, especially during a downturn. If you are still receiving a paycheck and can start (or continue) putting in the same amount of money into an index fund right now, you will look back on these times as the moment when you vastly multiplied your ability to create wealth.
Takeaway:
If you have followed the previous letters but have yet to pull the trigger on an investment, now is the time to get into the Cal Ripken habit of investing. Pick an index (or a few indices - we’ll cover diversity soon) and set a calendar reminder for when and how much money you’ll put into that index. Remember, to get the benefits of this method, you need to put in the same amount of money each time.
Interact:
Have you started an IRA already? Instead of putting all of your money into your IRA right before tax day and then invest it all at once, you should start now by putting a fraction of how much you want to put in and make monthly contributions all the way through the end of the tax year.
If you don’t have an IRA, start one and then follow the advice above. Additionally, you can use other investing platforms without the tax benefits of an IRA while following the principles of DCA, just set that reminder!
Either way, please email takewinnings@gmail.com to share your acts of investment!
Gratitude:
Next week, I’d love to share gratitude to you for clicking and sharing Winnings with your friends and family - and if you really don’t like the letter, with your enemies. More exciting developments are underway, but having a strong base of readers is the premise that makes this a valuable resource.