$50 Silver: Bubble or New Norm?

I haven't purchased any significant quantities since silver was $16. Since then, I bought a few "collector" coins and sold a fair amount of mining stocks and "paper" PMs since November.

 

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I don't like DCA and would never use it to buy something that I think might be overpriced to begin with.

For COP, the easiest way is to look at a few large silver miners and just divide total costs [not just cash cost] by number of ounces produced. Then add on about 5% for a "normal" profit margin. I haven't done this for awhile, but I should since energy costs have soared.

 

It is not just the small investor. Institutional investors are plagued by this as well. Asset managers make significantly more than the institutions they invest on behalf of.

 

I've never liked DCA but I'm a fan of mechanical portfolio management techniques because they take the emotion out of it. If you play around with a spreadsheet, it quickly becomes apparent that DCA outperforms lump sum investing in only one special case - where the price drops significantly below the initial price and stays there for a reasonably long time. In all other cases. it loses. There is also a great danger that a relatively small monthly investment can result in a huge loss if the market turns down a decade later. Someone could be investing $100 per month using a "safe" DCA program and suddely find that they have lost $6,000 a decade later. It is also psychologically tough for someone to continue the program when prices are in free fall. So I doubt that very many people can successfully use DCA over the long term.

 

Just as an aside, I would like to see those comparisons someday. I have seen many models showing long term DCA can be preferential to lump sum investing in many markets, less preferable in others. Also, are you accounting for TVM in your calcs? The keys to it are: Timing of lump sum obviously, interperiod volatility, and your TVM assumptions. If someone would LIKE to put 100k in an investment, but has to borrow it to lump sum in, that creates a very high TVM. These assumptions are all variable, and depending on them will easily cause models to skew. Maybe a off topic point many here don't care about.

That said, if someone wanted to use another methodology to force an investor to break bad habits fine. I just find DCA easy to understand and get acceptance from non-financial people.

Chris

 

Medoraman,
For the vast majority of people out there, DCA is the way to go. However, if you look at the greatest investors that are known for it, there are two scenarios that they are known for: large bets at the right time (hard to maintain but can create vast amounts of wealth. i.e. John Paulson, George Soros, etc.) or a mechanical process that is contrarian (Buffet). In the mean time, even with DCA, if you have an active mutual fund, odds are you lose after fees. best to just "buy the market" (an index fund as cheap as possible).

 

I would never suggest that someone borrow money to invest it. The TMV isn't a big factor with interest rates so low and dividends on stocks higher than most money market funds. If someone doesn't know what they are doing, they obviously shouldn't invest $100k in a lump sum, but probably shouldn't invest it using DCA either. You can easily prove this to yourself. Just populate a spreadsheet with various imaginary stock prices. You will quickly discover that DCA usually isn't the best method. I think that studying the principles of value investing or even technical analysis is preferable to using DCA.

 

We always 95% agree. The problem with your comparison is many people want to get into a market but have to put in just a bit at a time, and as such I would rather they DCA than try to "guess" when to mini lump sum a year's worth of investments.

Man, you wish the man on the street to study technical analysis! I have a hard time with most understanding why they should invest in equities versus money markets at all, let alone read college texts on technical analysis that I found boring. Yeah, I would prefer everyone in the US read some good value investing, technical analysis, and growth investing books as well, but it will never happen.

We are on a different curve than most Cloud. DCA is a tool, I use it sometimes but mostly not, but its a nice simple tool to get people started to invest, which is the first hurdle we have to clear. I simply find it useful when I am searching for a top or bottom until I get further information.

 

If someone wants to get into the market but isn't willing to put in the work, they should stay out of the market. Period. Maybe they are the same people who want to do a little scuba diving, but can't be bothered taking lessions. Or want to hang glide, but plan to just figure it out on the way down. Also, I think you are overstating the difficulty. College texts overcomplicate everything because they are designed to create a financial priesthood and not teach people how to grow their money. Anybody interested in value investing can learn 90% of what they need by reading The Intelligent Investor by Ben Graham and The Money Masters by John Train. Anyone interested in technical analysis can learn everything they need by reading William O'Neil's book, How to Make Money In Stocks, plus Jack Schwager's Getting Started in Technical Analysis. None of these books are difficult to understand. Anyone unwilling to put in at least a few hours of reading has no business expecting anything other than bad results from investing in the market. If they don't know at least this much, DCA isn't going to save them because they will panic when things go against them and they realize they are in way over their heads.