Prices Matter

Never depend upon numbers alone. Look for and rely on cause-and-effect. Always use common sense.

I see the need for price discipline repeatedly. It is not difficult. Yet, I see it violated repeatedly and at a great cost. Much of our Safe Withdrawal Rate research comes back to the one theme: prices matter. Many of our advances are based on the one concept: wait for a good price, which is a reasonable price, but not necessarily the best price.

Consider our models. They violate common sense badly. They act mechanically. They make withdrawals on the same day of every year. This is similar to dollar cost averaging. But it acts in reverse when making withdrawals instead of adding deposits.

Dollar cost averaging is a great idea during accumulation (in the absence of a strong trend). It reduces the average cost of the shares purchased. Typically, this is 5% to 10% or even more. Applying the same procedure in reverse is expensive. It reduces the amount that we can get from selling shares by the same 5% to 10% or even worse.

With price discipline, you should seek a price that is, at least, as good as average and possibly better. It is reasonable to try for prices in the top third of their 52-week range when selling and in the lower third when buying. Sometimes, you will have to sell for less. Never do you have to pay more.

Prices fluctuate. They fluctuate a lot. If you allow yourself enough time, you can almost always get a fair price. You should not expect to get the best price, although you may.

Three years seems to be the right interval. Stocks recover enough within three years for you to mitigate your losses after a steep drop. As for buying, expect some stocks to get away. There will always be enough opportunities inside of a three-year interval for you to find something that is reasonably priced.

I routinely use limit orders when buying and selling stocks. If I cannot get my price within a month, I may adjust my price. I may stick with my price. I may abandon the transaction. Or I may substitute another stock. Whatever I do, it will be in a deliberate manner.

I have done this consistently. Yet, I have been told that getting a reasonable price by waiting is impossible. People are willing to believe that stocks are always priced correctly regardless of the obvious: stocks fluctuate much too much to be priced accurately (except as a fluke). Yet, I am told not to regard fluctuations. It is ridiculous. It violates common sense.

During the run up of the 1990s, I kept reading assertions that we should buy stocks without much regard for the price. Growth would overcome any differences in the long run. I still see such nonsense. Even to this day. I wrote An Illusion of Numbers as a counter argument.
An Illusion of Numbers

Price discipline is central to another thought: how to exploit skill. I admit it. I am offended when I read studies that buy high and sell low. The investigators have people buying the hottest funds when their prices reach a peak. Then they wonder why investors do not do so well later on. I admit that many new investors fall into this trap. Serious researchers would have investors buying only on dips. Serious investing requires waiting for favorable prices.

We have learned much and added numerous details. I have listed some of our more important findings in More Than a Number. We always require that our conclusions make sense. We use numbers to draw the picture and to fill in the details. But we rely only on what satisfies common sense. In retrospect, it seems obvious that Safe Withdrawal Rates should depend upon starting valuations. Prices always matter.
More Than a Number

Have fun.

John Walter Russell
July 25, 2005