Stock Investment Ratio for High School Dropouts

Stock Forecasting?Having chosen a standard ratio, he must not allow
If forecasting in the stock market is dangerous, howcurrent stock-market conditions to persuade him to
can an investor time his buying and selling of stock?change the ratio. If he adopts one ratio when stock
The simplest answer is to ignore the price level, toprices are dropping, and changes to another ratio
buy stock whenever he has savings to invest, andwhen prices are rising, he is slipping into forecasting. A
not to sell unless he must. And he must also ownstandard ratio has no chance of success unless, after
fixed-dollar deposits because it opens an opportunityan investor adopts it, he parks his emotions outside.
to buy stock at lower-than-average prices and to sellBuying under a standard ratio goes this way: When
at higher than average, without forecasting.an investor has new savings available, before placing
The Investment Ratio.them he finds out what the current values are of his
Momentarily ignoring the question of timing of stocktotal stock and his total bank deposit, not counting
purchases, let us suppose A has $1,000 of newthe emergencies reserve. Then he puts his new
savings to invest on the first day of each month.savings into whichever one is low in value compared
With half of this he buys common stock, and theto his standard ratio, as A did with his $1,000 monthly
other half he puts it into a savings deposit. Hissavings.
savings are always divided equally between stockNo New Saving Situation.
and cash reserve. During the first year he depositsWhen an investor has little or no new savings, he can
$6,000 in the savings bank and pays $6,000 forgain the benefit of the standard-ratio plan by applying
stock, buying 120 shares, an average of 10 shares athe same ratio to both selling and buying stock.
month, at an average price of $50 a share. (ForSuppose B's annual spending is exactly equal to his
simple illustration the expense of buying and sellingincome, so that he has no new savings, nor is he
stock, also the income on investments, are excludedspending any capital. His standard ratio is 1 to 1, and
here.)the current value of his capital agrees with this; 2,000
Now let us look at A's market or redemption values.shares of stock at $10 a share total $20,000, and
On January 1st of the second year the current value$20,000 in a savings deposit.
of his savings deposit, disregarding interest, is theThen the value of a share drops to $8, making his
same as his cost. But the market value per share oftotal stock value $16,000. To restore his values to
his stock has dropped to $40, giving his 120 shares aagreement with his standard ratio, he withdraws
value of $4,800, or $1,200 less than his savings$2,000 from savings deposit and buys 250 shares of
deposit. With this drop in price, his usual $500 monthlystock. This cuts his reserve to $18,000, and also
purchase would pay for 12 shares, as compared toraises his current stock value to $18,000.
his previous average of 10 shares a month.Next, the value per share rises to $10, the same as
At this point A decides he wants the market valuethe original figure, and his 2,250 shares have a current
of his stock to equal his savings deposit, and that hevalue of $22,500. Again acting to restore his values
should adjust his buying to accomplish this. So onto his standard ratio, he sells 225 shares of stock for
January first he makes no savings deposit but puts all$2,250, and adds this to his savings deposit. This
of his $1,000 monthly saving into stock, thus raisingleaves him with 2,025 shares of stock, valued at
the total stock value to $5,800, as compared to$20,250, and $20,250 in bank deposit, his total capital
$6,000 in the savings deposit. With the $1,000 hebeing $500 larger than at the start. (For accuracy,
buys 25 shares, 2.5 times as many as his formerthe expense of buying and selling should be
monthly average. Later on, when a rise in pricesubtracted from this gain.)
causes his stock value to exceed his savings deposit,Stock Value Movement and Value Gap.
he offsets this by putting all or most of his newA switch of old capital between stock and bank
savings into the savings deposit.deposit should not take place until stock value has
Action Plan.moved far enough away from the standard ratio to
Now let us expand A's action into a plan. First, anjustify the expense and trouble of changing. In the
investor selects a standard ratio that he will maintainabove example, B bought stock when his stock value
between the market value of his common stock andwas 20 per cent below his reserve value. And he did
his cash deposit. The idea can be applied to any rationot sell stock until his stock value was 25 per cent
an investor prefers.above his bank deposit value. The desired gap can be
To maintain a stable lifestyle for the family, someprovided automatically by setting up a standard ratio
additional reserve says $5,000 would be needed forfor selling stock that is different from the buying
personal emergencies outside the investing portfolio.ratio.
On starting to save $1,000 a month, he might adoptRatio System Requires Discipline.
a standard ratio of $800 stock to $200 fixed-dollarIt helps you decide when the share price moves
deposit, but not counting $5,000 in his emergencydown, how many shares to buy into your stock,
reserve. For the first 5 months all his savings go intodrawing from your available bank deposit. It also
this special reserve, thus completing his goal forprompts you during the stock soaring months, how
emergencies. In the sixth month, observing hismany shares to sell in order to keep to your initially
standard ratio, he puts $200 into cash deposit andset ratio.
$800 into stock.