The Hidden Premium
G. S. PATCHET currently resides in London, Ontario. This is his first appearance in Accent on Living.
Some years ago, I began subscribing to the Wall Street Journal because I was intrigued by a subscription solicitation in the local paper headed, as I remember, “I was going broke on $9,000 a year.”
I was going broke on less, but the advertisement went on to say that the Journal was invaluable to those making between $7500 and $25,000, and since I fell within this wideranging bracket, I sent them enough for a six months’ trial subscription.
I read the paper assiduously every night but without financial improvement. I was enlightened on the balance-of-payments crisis, the gold crisis, the profit squeeze, and the wage-price spiral. I became an expert on federal deficits, the national debt, and creeping inflation, but I continued to go broke.
The future of the stock market seemed as clouded to the experts as it did to me, and it was in common stocks that I was determined to make my killing. Just when my umns and the manager, out of sight was presumably working some other part of the transaction. It seemed to require the constant bustle of opening and closing drawers.
“If it’s a great deal of trouble,” I ollercd, “1 have some traveler’s checks. You could just cash those.”
The manager heard this defeatist suggestion and came out of hiding. “Oh, no, sir, he said proudly, as he handed me a draft to sign. “We like this. Keeps us on our toes. This is higher banking!”
I got my money — “four pence ha’penny more than if the exchange for twenty dollars had been multiplied by five,” the assistant beamed. It was miles later when I realized my friends had not questioned the signatures. Nor had they completed their higher banking: they had forgotten to affix the required stamp on the draft and have me inscribe my own illegible signature across it.
subscription was about to lapse, I read about “Dollar-Cost-Averaging,” the magic formula used by the mutual funds. “Thoughtful forward-looking people in all walks of life are finding the magic formula to financial security by putting a few dollars aside each month and buying mutual funds. Professional managers, skilled in security analysis, take the burden of selecting stocks off your shoulders. . . . Why not write to us?” I didn’t even bother to clip the coupon for more information. 1 telephoned that day and committed myself to forty dollars a month.
In those halcyon days before 1962, my fund boomed. Each month I received a statement showing the balance of my account, and each quarter a financial statement of the fund with graphs and charts showing how much smarter my managers were than the Dow-Jones averages.
I was beginning to plan a down payment on a new car.
When the market turned in 1962,
I paid little attention. I knew my professional managers were busy shouldering their burden. But when my fund and the Dow-Jones began to fall, blandly ignoring each “support level,” I became alarmed. I had the Chevy overhauled.
When the market sank like a stone in May, my fund and my hopes touched bottom. And then, just as I had given up all hope, professional management came to my rescue. Enclosed with the May statement of my contributions was a green slip which went as follows:
THE HIDDEN PREMIUM
You, like thousands of thoughtful forward-looking people, started your mutual fund in order to accumulate capital. You realized that by combining DOLLARS plus TIME plus COMPOUNDING you can acquire a great many mutual fund shares. And THIS is your goal — to own just as many shares as you possibly can.
But are you aware of the hidden premium?
From time to time, as your capital accumulation plan progresses, share prices will fall. AND FOR YOU, THIS IS GOOD! You acquire more shares for the same number of dollars. These extra shares will earn extra dividends — which will buy more shares — which will earn more dividends . . . and so on, as long as you continue with your plan. Conversely, as share prices rise, you buy fewer. This investment formula — buying by the “dollar’s worth” instead of by shares — is one of the oldest and soundest of stock-buying principles. It is followed by experts. Such experts call it “DOLLAR-COST-AVERAGING.” You, however, as you see the greater number of shares your dollars are buying, can rightly think of it as THE HIDDEN PREMIUM.
It all became so clear. I couldn’t wait to share the good news with my wife. Here we had been worrying our heads about the stock market, reading the bid and ask quotations even before we read Ann Landers. Every time our fund went down, we thought we were getting poorer. Now we realized that the lower it went, the better off we were. No wonder thoughtful, forward-looking people were putting their savings into mutual funds.
I think it all goes to prove that the stock market is not for the amateur; there just is no substitute for the expert. I wish I could make this point clear to my wife, but, then, women are usually pretty muddleheaded when it comes to money.