Our scene opens on a wonderfully warm spring day. The kind of day in Houston that makes you forget it’ll be 105 degrees in a few months. Bob and Tom decided it was too nice a day to waste inside.
As they sat on the patio, Bob and Tom’s lively chat eventually turned to the stock market. For Bob, the conversation turned decidedly sour.
“I spent $10,000 and bought 1000 shares of Fake Corp a year ago after a great article in the Investment Buzz Journal. It was $10 a share back then. Now, a year later, it’s just getting back up to $10 per share after the market drop. I didn’t make any money on it this past year” complained Bob.
“What a coincidence,” said Tom. “I read the same article about Fake Corp and decided to invest $10,000. But my investment is worth over $11,000 now,” revealed Tom, trying hard to hold back the pride in his voice.
Bob responded, in a voice that was a little too loud, “WHAT!? Why are you up $1,000 on the same investment!?”
In a tone more sheepish than his previous remark, Tom replied, “You see, I didn’t have the $10,000 available a year ago to invest all at once. Instead, I had to invest about $800 each month.”
“But the stock tanked! How did you make money?!” demanded Bob.
Perhaps you, the reader, are also wondering how this happened. Good News! Now is the point in the story where the narrator solves the mystery.
Bob bought all his shares at $10. But when the market ‘tanked’, Tom was able to buy some of his shares at a price lower than $10. The lower price enabled Tom to buy more shares with the same $800 a month investment. He owns about 1100 shares vs. Bob’s 1000 shares.
Then, when the stock price rebounded to $10, Tom’s extra shares bumped up the total value of his investment. 1100 shares multiplied by $10 equals = $11,000. The chart below follows the value of Bob’s and Tom’s investments in Fake Corp over the year. If you like charts, you’ll find it delightfully enlightening.
Of course, what Tom didn’t share with Bob was the hesitation Tom felt about this stock when the price dropped to $6 per share. To his credit, Tom didn’t stop his investment plan. The result is that he was able to take advantage of the price changes over the year.
Tom may have gotten a slower start and had to endure some bumps, but in the end, he came out ahead.