Scaling In: How to Buy a Stock with Patience and Clarity | Exploring Markets

Scaling In: How to Buy a Stock with Patience and Clarity

"When I'm bearish and I sell a stock, each sale must be at a lower level than the previous sale. When I am buying, the reverse is true. I must buy on a rising scale. I don't buy long stocks on a scale down, I buy on a scale up." - Jesse Livermore

One of the worst things an investor can do is buy a stock all at once. But this is how most new investors approach the market. Almost everyone has been there. You have some money, you see a stock you like, and you buy it outright with one order.

Ask yourself this: do you think Warren Buffett buys a stock all at once?

The answer is no.

The best and biggest investors buy stock over time, at fixed sums of money, and at ideal price points. This is called, "scaling in." The advantages are endless. The strategy is less risky, systematic, and enabled over a longer timeframe.

1. The strategy is less risky: Picture the act of scaling in as being a batter in the MLB stepping up to the plate. Buying stock all at once is essentially swinging at the first pitch every single time. But if you spread your capital and deploy it over time, you're now giving yourself more pitches to swing at. Taking balls when you want and swinging at the fat pitches as they cross the plate.

Let's say you have $3,000. You can buy a stock outright at that very moment or you can design a system and spread the $3,000 out. You buy $1,000 worth and keep the other $2,000 in cash. You watch the stock for a month, studying its movement and following the company story. You've waited patiently and can now evaluate your initial $1,000 investment. Maybe the investment is not going as planned and so you sell and move on. Or maybe the market crashed, a panic ensued, and now you can deploy more capital to lower your cost basis by buying at extremely depressed levels. Or maybe the stock is acting just as you expected and you want to put another $1,000 to work.

2. The advantage of a system: Scaling in is the act of following a system designed by you. Systematic investing and trading can have several advantages. It eliminates psychological tendencies that negatively impact a person's ability to manage money. Instead of buying at a random and spontaneous moment, you scale in at moments when your system tells you to. Maybe you want to buy at the start of every month at 9:30 AM ET. Or maybe you want to buy each time it drops 3% from a new 52-week high. There are countless ways to build your own investing system and it will add structure to your investment process.

3. Make time be on your side: The single most powerful advantage of scaling in is the fact you have now enabled time to be on your side. There are 5,000 stocks in the entire market all trading from 9:30 AM ET to 4:00 PM ET each weekday. The US stock market has been open for more than 100 years. Why would you want to buy a stock all at once? Unless a meteor hits, the stock market isn't going anywhere. It's survived two World Wars and a decade of fighting in the Middle East. Harness time and make it your friend.

There's no rush to buy anything all at once. Having cash to deploy at your own pace and system is a way of leveraging time. You can look to the future and plan months or years from now. The second you buy a stock all at once, your money is suddenly at the mercy of time. There's no optionality available to you. Let your capital live longer by putting it to work over time and by scaling in.