Buy in Thirds

How many times has this happened to you? You find a compelling company -- perhaps China's The9 (Nasdaq: NCTY  ) , an online gaming enterprise. You like its recent financial report, which featured quarterly revenues up 232% over the previous quarter and up an eye-popping 2,096% over the year-ago quarter. Net income came in at $4.7 million, from a loss of $2.8 million last quarter. Sounds great, eh? (Of course, this is nowhere near enough information on which to base an investment decision.)

Perhaps you then read W.D. Crotty's thoughts, where he pointed out that the company, strong as its performance was, didn't perform as well as analysts had expected. And the business is dependent to a large degree on one game that's very popular right now.

Let's say you really like the business and think it will be a long-term winner. You think you might catch a better price later but don't want to miss out in case the stock takes off. So what should you do? Well, consider a strategy used by many investors: buy in thirds. If you really want to own a piece of the company but aren't convinced this is the best entry point, you might buy just a portion of what you ultimately want to own. On our Investing Beginners board, Fool Community member chicagocubs explained the system well, using a stock he owns:

"First of all, you need to determine what a full position in your portfolio would be. You could look at this as a certain percentage or dollar amount that you intend to invest in a specific stock. . Lets say I want to invest in [Motley Fool Rule Breakers recommendation] Harris & Harris (Nasdaq: TINY  ) . My full position would be around $4,000.

"On March 1, 2005 I buy 100 shares at $13.50/share ($1,350)

On April 12, 2005 I buy 125 shares at $11.00/share ($1,375)

On August 30, 2005 I buy 125 shares at $11.20/share ($1,400)

"So I entered into my investment in thirds, buying a total of 350 shares for a total cost of $4,125. The average price paid per share is $11.78. If I had entered into a full position when I first decided to buy TINY, I would have spent around $4,000 and would only have around 300 shares ($4,000 divided by $13.50 is 296)."

"Please remember that the share price of a stock could be increasing during this time and then you may have a higher dollar cost average per share and most likely fewer shares owned."

If you don't know what dollar-cost averaging is, read up on it. And know that you can, of course, also buy any stock in two installments, or four, or every quarter for seven years. It all depends on your needs, your outlook, your financial situation, and many other factors. Regardless, buying some now and then waiting will let you buy more at a better price later if the stock falls ... but if the stock takes off, at least you have a piece of it.

And by the way, if you're still iffy about The9 or whatever other companies you're deliberating over, consider checking out one or more of our investing newsletters -- which you can do for free. Each will let you peek at a long list of recommended stocks (or funds). Our Motley Fool Hidden Gems newsletter focuses on small, growing companies, while our Rule Breakers newsletter is after dynamic, innovative outfits, and has recommended several China-based enterprises, too. Both sport impressive track records, which you can also examine.

LongtimeFoolcontributorSelena Maranjiandoes not own shares of any companies mentioned in this article.


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