The Intelligent Investor

Everyone, from Robert Kiyosaki to Ben Bernanke, from Alan Greenspan to yours truly, has been speculating recently about whether we are heading for a recession. The answer is certainly yes, but the big questions are when, how severe and what to do about it.

Meanwhile, my son gave me a copy of "The Intelligent Investor", the definitive book on value investing by Benjamin Graham. In the preface, Warren Buffet says Graham was had more influence on him than anyone other than his father. I'd heard of Graham before, of course, but had never read any of his work. I'm only part way through, but I'm already absolutely amazed to see the similarities between Graham's philosophy and what I've been writing here in this space.

And right there on page 2, written over 50 years ago, he quotes an example that sheds more light on the recession question than anything I've seen from the illustrious names above. It is set in 1929, the year of the penultimate recession/depression. The DJIA was at 300. The crash came, followed eventually by a recovery. But, by 1949, the Dow had recovered to only 177. Ouch, that is a serious depression!

Here's the kicker...If you had invested equal amounts each month during this same time frame, by 1949, when the Dow was still down 41% from your starting point, you would have gained over 8% annually on your money, more than doubling it. How is that possible, you ask? It is the result of dollar cost averaging.

Those who have been dollar cost averaging over the past several years have already seen even better results. So, if you are just starting out, quit worrying about a recession and jump in. The results from 1929-1949 demonstrate majic that is rare in financial circles.

Unfortunately for those of us who have accumulated substantial nest eggs, things are not quite so simple. We still have to worry about the potential 41% reduction in our starting balance. Besides, today we have the option of investing in several different markets. And those are the reasons I developed the "Dollar Cost Averaging on Steroids" system. I'm still hoping to find something similar in the later parts of the book, but I can see already he would approve of the concept.

It takes maximum advantage of the diversification available today to extend the majic, even in the face of significant correlation, especially for those with significant portfolios. If you are interested you can read about it in my prior article (March 12, 2007). I suspect Graham had something similar in mind when he talks about going to a cocktail party and enjoying the opportunity to participate in the market discussion with "I don't know, and I don't care. If it goes up I'll make money and if it goes down I'll buy at better prices." Yes, whether he invented it or not, he would have been a fan! I think I've used some similar words in decribing my process.

It may not be quite as simple, but it is not far from it. And it extends the basic dollar cost averaging principal to meet the needs of those who already have a substantial portfolio.