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Modified Value Averaging



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Hi Everyone!

Yesterday we discussed about the concept of Value Averaging method of investing.

I know it involves some math but it should be not that difficult.

One question i received from several of our friends is about rounding off.

For instance if our daily budget is Rs. 1000 and the CMP of the share is Rs 51.4, we will get 1000 / 51.4 = 19.45 shares

Since shares will not have fractional value, we can round it off to 19 or 20 depending on your preferance.

For instance, if we take 20 shares we might buy marginally over the Rs. 1000 mark.

This is not a problem because the next day budget of Rs. 1000 will try to average the excess buy we made.

This is one of the advantage we have in averaging methods.

Do you have any questions about the topics we discussed yesterday?

Okay lets jump into the next topic. *Modified Value Averaging*

What is the disadvantage of Value Averaging method?

In Value Averaging, there is no predictability of the daily amount we have to invest

The amount we invest on a given day can be determined only by the CMP of the stock

But *Cost Averaging* has overcome the daily budget problem by limiting to the pre-determined daily budget of Rs. 1000

In VA, as the price of the stock goes up, there will be days we will invest too little or almost none.

So, the Modified VA method bring this condition: Limit your daily investment to a maximum of the daily budgeted amount.

Lets take an example.

Day 1

Daily Budget: Rs. 1000

CMP of the stock: Rs. 10

Shares that can be bought = Rs. 1000 / Rs 10 = 100 shares

Day 2

Budget / Value: Rs. 2000

CMP of the stock: Rs. 7

Value of our holding: 100 shares x 7 = Rs. 700

Amount to be invested = Rs. 2000 - 700 = Rs. 1300

In VA method, we will use the full Rs. 1300

But in Modified VA method, we will use a maximum of Rs. 1000 per day.

So instead of Rs. 1300, we will limit to Rs. 1000 only

Shares that can be bought = Rs. 1000 / Rs 7 = 142.85 = 143 shares

Total shares at the end of Day 2 = 100 + 143 = 243 shares

Day 3

Budget / Value: Rs. 3000

CMP of the stock: Rs. 9

Value of our holding: 243 shares x 9 = 2187

Amount to be invested = Rs. 3000 - 2187 = Rs. 813

In Modified VA method, we will use a maximum of Rs. 1000 per day.

So instead of Rs. 1000, we will limit to Rs. 813 only

Shares that can be bought = Rs. 813 / Rs 9 = 90.33 = 90 shares

Total shares at the end of Day 3 = 100 + 143 + 90 = 333 shares

So its a mix of CA & VA sir?

Exactly!

So with this method we are overcoming the both the problems of the VA method - that of using Lot of money and Risk

Understood?

Now, will you computer for Day 4?

We can spend less than our daily budgeted amount to balance our portfolio but we can't spend more to balance.

Yes. That is why we said maximum of

Day 4

Budget: Rs. 4000

CMP of the stock: Rs. 11

Now you compute the other data

Value of our holding at the start of Day 4: 333 shares x 11 = Rs. 3663

Amount to be invested = Rs. 4000 - Rs. 3663 = Rs. 337

In Modified VA method, we will use a maximum of Rs. 1000 per day.

So instead of Rs. 1000, we will limit to Rs. 337 only

Shares that can be bought = Rs. 337 / Rs 11 = 30.63 = 31 shares

Total shares at the end of Day 4 = 100 + 143 + 90 + 31 = 364 shares

Then how is Modified VA better as compared to CA?

CA ignores price moments. It is a blind buy to the extent of daily budget.

But in Modified VA, we buy less or none if the price goes up and buy more when the price falls.

In general, this is what exactly we want:

Buy when price falls

Sell when price goes up.

Simply said, Buy Low - Sell High

But since we are long-only guys, we will just buy or sit silent.

In fact this is easier said than done.

If you want to practically implement this method, you should be precise in your daily budget determination.

For those who are already investing, i suggest you to do proper money management before venturing to use any of the investing methods.

Because once you start, you cannot stop.

We might feel that investing Rs. 1000 might be okay but can we do this month after month?

For first month, we need Rs. 1000 x 25 sessions = Rs. 25000

For one year, we need Rs. 1000 x 25 sessions x 12 months = Rs. 3,00,000

This is a huge amount to invest on a single stock for the average investor.

Right?

Shall we go to Day 5?

Day 5

Budget: Rs. 5000

CMP of the stock: Rs. 8

You compute the rest

Do it now. I will wait

Value of our holding at the start of Day 5: 364 shares x 8 = Rs. 2912

Amount to be invested = Rs. 5000 - Rs. 2912 = Rs. 2088

In Modified VA method, we will use a maximum of Rs. 1000 per day.

So instead of Rs. 1000, we will limit to Rs. 1000 only

Shares that can be bought = Rs. 1000 / Rs 8 = 125 shares

Total shares at the end of Day 5 = 100 + 143 + 90 + 31 + 125 = 489 shares

Hope you can work on the method easily

Any questions from any of the topics that we discussed right from the beginning?

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