Strategic Costing Method

We are all familiar with Average Costing Method, which investors recommend as one of the best strategy to ensure you win in stock market. According to Investopedia.com,  Cost Averaging Method is  costing method by which the value of a pool of assets or expenses is assumed to be equal to the average cost of the assets or expenses in the pool. For example, if one share of Company A’s stock is purchased on June 1 for $50.00, again on June 15 for $35.00, and again on Aug 10 for $40.00, the average-cost method assumes that three stocks were purchased for an average cost of $41.67. This number is arrived at by adding $50.00 + $35.00 + $40.00 and dividing the sum by 3, because there are three stocks in the pool. In Philippines, Banco De Oro Trust offers easy Investment Plan Program and CitiSec offers Easy Investment Program which applies Cost Averaging Method.

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When I subscribe in Truly Rich Club, they have better strategy based on Cost Averaging Method, which is called SAM or Strategic Average Method – this is the passive long-term investment strategy TRC follow to make millions in the stock market. Especially in periods like today, where we’ve been seeing the stock market moving sideways, this is the easiest way to make money in such a market scenario.

Here’s how it goes, the article below is from TRC SAM Quick Start by Bo Sanchez, issued in September 2012. I just customized the example, to be relevant for today’s market.

1. Invest small and slowly.

Invest comfortable amounts. Don’t invest big chunks of money all at one go. Invest small amounts regularly to get good opportunities to buy at low prices when stock prices are down. In other words, invest small amounts to get good average prices overtime. This concept is known as cost averaging. Like what Bro. Bo suggested before, if your money is smaller than P300,000, divide your money into six parts, and invest each part for the next six months. On the other hand, if your money is more than P300,000, divide it by more than six parts. Perhaps by 12 parts and invest each part regularly.

2. Buy at Buy Below prices.

For each SAM stock we recommend, TRC have what we call a Buy Below Price (which is the same as CitiSec’s recommendation). This tells us when to buy that stock. As long as the price of that stock remains lower than our Buy Below Price, we continue to buyregularly (every month, every quarter, or every week). You can check the Buy Below Prices of our SAM stocks in our next Stocks Update eReport that will be sent to you if you subscribe. I will post monthly in my blog site the SAM stocks update. I just want to share this information for free to all my readers.

TRC SAM Stocks Update Table

TRC SAM Stocks Update Table

For example, one of SAM stocks is Megaworld. (MEG) and its Buy Below Price is P4.70, while its current market price is P4.31 (As of  August 7, 2014). This means that as this is the price we can buy shares of MEG.

 3. Stop buying when prices go beyond our Buy Below price

When the price of a SAM stock goes higher than our Buy Below Price that means we should stop buying. However, if the prices of our SAM stocks go back lower than our Buy Below Price this gives us a signal to start buying again. We want to be buying at Buy Below prices because we want to buy at attractive prices or valuations. On the other hand, we stop buying when prices go beyond our Buy Below Price to avoid buying at high priced valuations. Going back to our example earlier of MEG with its Buy Below Price at P4.70, if at one point the price of the stock goes up to P4.70, this would signal for us to stop buying such shares for it has crossed beyond our Buy Below Price. However, if ALI’s price goes back to P4.30, then this means it is once again below our Buy Below Price. This means, we can again buy shares of MEG at that price.

4. Wait for the Target Price. Sell when the Target Price is hit.

The Target Price is a projected future price of a stock that we believe the stock will go to or go close to given the performance of the company. This price is used by brokers to estimate the potential growth of a company considering a 1-year point of view. So after accumulating shares at Buy Below prices, all we have to do now is wait. Like tea that we steep, or wine that we store over time, we wait patiently and let time coupled with the company’s consistent good performance drive up the price to our Target Price. As soon as the market price of our SAM stock hits or gets close to our Target Price, we sell. This means that we’re selling our shares and we’re locking in our profit. By this time, we’ve already made money! We’re one step closer to becoming millionaires! Now using the same example of MEG with its Target Price of P5.48, if the current market price goes up to P5.48 or close to that price, then this would raise our sell flag signifying that we should already sell.

5. Reinvest to other SAM stocks.

Use the money you made from selling a SAM stock at our Target Price and reinvest it, buying shares of our other SAM stocks that are still priced below our Buy Below Price. By doing this, you’re compounding your previous profit with the potential profit you’ll be making with this new SAM investment. It’s like rolling-over a time deposit in the bank. I’ll talk about the concept of compounding on our next issue. This is another key to making our millions in the Stock Market.

Stick to SAM’s System. We just need to follow it, follow it to the dot. Follow the system and you’ll make money. It’s that simple. The only thing challenging about it is the discipline it requires. So choose to be disciplined and stick to the system, stick to SAM’s system no matter what, even in times of crisis. One day your discipline will be rewarded. Look forward to that day!

It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price. – Warren Buffett

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One thought on “Strategic Costing Method

  1. Nice article, I like the method, will definitely try to give it a go with one of my investments. Also you should probably mention DCA (Dollar Cost Averaging), where you take a set amount of money every month (e.g. a portion of your monthly paycheck) and buy into stocks such as a market fund every month. That way, if the market is low, you buy more shares with your money, and when it goes higher, you’re still buying, but you’re buying less shares in case it goes down. That way, you’re still increasing your exposure to your company even if it goes up, in case it keeps going up.

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