The Theory of Progressive Buying

24 Aug 2008



I will explain my personal experience with my own theory of buying stocks progressively at each decline. Here is my theory

1. Select a "good" stock. I will call a good stock one with low P/E in the range 10 to 15. It should appeal to your inner sense. It should have good growth potential. That means the forward P/E should be even lower.

2. Select stock that is in lower price range about 10 to 20 dollars. You should enough funds to buy 5000 stocks, 100 to 1000 at a time in succession. If you have enough funds, it does not matter if the stock price in 100. But you will need more money.

3. Wait for the stock to go low. Do not be in hurry. When you think that the stock is low enough, buy 100 of the stock. Let us say you bought XYZ at 20.24

4. Now wait and watch. If the stock goes up - be happy. Sell when you feel you have made enough.

5. If the stock goes low, dont be panic. Research more. Make sure it is not your bad selection. Make sure it is just due to market condition etc. If you feel confident wait for a 5% to 10% decline. Buy 200 more at say 5%. Let us say XYZ falls to 19.20. You are confident that this stock is good. So you buy 200 at 19.25.

6. If the stock rises from here - be happy. If it falls, dont be panic. Buy 300 of these if falls another 5%. Let us say XYZ falls to 18.25. Now buy 300 of these at 18.25.

7. Continue this strategy and keep increasing the number of stocks you buy.

8. At one point the stock starts rising. Now, since you have been buying in increasing quantities you "weighted" average is towards the lower end of the price.

9. You should be able to break even sooner, since your weighted average is towards the lower side. You may like to sell at your comfortable point.

Some Precautions

Do not play with stocks that you do not know about. Play with safer stocks. The method will work most of the time but it dangerous too. I have burnt my hands once. The stock may keep going down and never recover. You may stand to loose all your money if a $10 stock becomes a penny stock. So play safe with a relatively safer stock.

My Experience

Here is my experience with WIT. Wipro Information Technology is and Indian Information Technology Company which I feel is not excellent but is good enough and not risky for my case. The reason I chose it was that it was at $12.74 at the time I started buying it. My budget did not allow investing in INFY, which I would have liked to.

Here are my purchases for WIT

Stock Qty Price Date

WIT 100 12.74 6/20/2008
WIT 100 12.41 6/26/2008
WIT 100 12.14 6/26/2008
WIT 100 11.74 7/1/2008
WIT 100 11.79 7/2/2008
WIT 100 11.68 7/2/2008
WIT 100 11.33 7/8/2008
WIT 100 11.07 7/11/2008
WIT 100 10.79 7/11/2008
WIT 100 10.64 7/14/2008
WIT 100 10.25 7/15/2008
WIT 100 10.10 7/15/2008


As you can see, I did not buy it in increasing quantity as I mentioned earlier. For this reason my average price is 11.39. Had I bought it in progressively increasing quantities, the average price would have been much lower.

Had I purchased the stock in progressively increasing quantity, the above would have looked like

Stock Qty Price Amount Date WIT 100 12.74 1274 6/20/2008
WIT 200 12.41 2482 6/26/2008
WIT 300 12.14 3642 6/26/2008
WIT 400 11.74 4695.8 7/1/2008
WIT 500 11.79 5895 7/2/2008
WIT 600 11.68 7008 7/2/2008
WIT 700 11.33 7931 7/8/2008
WIT 800 11.07 8856 7/11/2008
WIT 900 10.79 9711 7/11/2008
WIT 1000 10.64 10640 7/14/2008
WIT 1100 10.25 11275 7/15/2008
WIT 1200 10.1 12120 7/15/2008


In that case I would have bought 7800 stock at a total price of $85529 at an average price of $10.96 each stock.

At Friday Aug 22, 2008 closing price price of WIT is 11.58. I would have stood to gain $4836.

On the downside $85K is a big money. Believe me WIT is bound to be much higher than $11.58 this in coming days. It is not a matter of if, it is a matter of when. It is not a matter if you will gain, it is a matter of how much you will gain.

The same principle applies for short. Wait for the stock to reach what you beleive is its height. Short the stock. Then wait. If it further increases short more, in progressively increasing quantity. When the stock starts reclining from it pinnacle enjoy it.