Buying Small, Scaling In

Now
The mist across the windows hides the lines
But nothing hides the colors of the lights that shine
--Joe Jackson

Years ago it hardly made sense to buy stocks in small quantities because of high trading commissions. Because it was not unusual to pay hundreds of dollars to a broker when placing a trade, investors typically bought relatively large blocks of stock at a time to keep transaction costs down. In fact, stock purchases of less than 100 share quantities became known as 'odd lots' because of their unusual nature. 

Now, with Charles Schwab (SCHW) recently eliminating trading commissions and most of the discount brokerage industry following along, purchasing stocks in odd lot quantities makes tons of sense for the everyday investor. Not only have transaction costs disappeared, but spreading buys out over longer periods of time helps manage risk, and often gets you in at a lower average price.

For example, today I began a position in General Mills (GIS) by purchasing a single share at about $53.20. I like the company's story (nice stable of brands and products, attractive 3.7% dividend yield, solid management), but, as you can see from the chart above, the stock has rallied over the past year and now trades at the high end of the 2-3 year range. As such, I suspect that I may be able to buy the stock at a lower price sometime in the near future.

However, by buying a little bit of GIS right here, I have satisfied my desire to own a piece of the company. Now that I own it, I'll be more prone to watch and study it. If the stock price does go down, then I don't have lots of capital at risk. In fact, I'll likely buy more if price declines (as long as the story hasn't materially changed). Perhaps I'll buy several times over the next few months until I acquire the full amount of GIS that I want. Meanwhile, if the stock happens to rocket to Pluto from here, then at least I have some exposure to the name that will allow me to participate in a big price advance.

By spreading my buys over time, I will have done what is called 'scaling into' a position. Scaling in reduces risk because it allows for acquiring shares at lower prices as the position is built in several increments.

Now that trading commissions have disappeared, there is little downside to buying small and scaling in.

position in GIS