An interesting story about the investment lesson learned by one man's desire to become a llama tycoon. Let's follow my hypothetical friend, Fred, as he pursues his lifelong dream of having a large llama ranch and find out what he learns about investing in the constantly changing llama market.
It all starts one cool, gray, November morning when Fred decided to start a llama ranch. His plan? Spend $100 each month buying as many llamas as he can until he gets a large herd. This month llamas cost $50 each. Fred has $100 to spend, so he buys 2. He is on his way, the first steps toward the wealth and freedom that only a herd of llamas can provide.
It's December now, time to buy more animals. The llama market is just booming and prices have gone up. It seems that everyone wants to buy llamas. They cost $100 each now. Not to be deterred from his quest, Fred buys one more to add to his herd.
January rolls around and llama prices are still at $100 each, and the news media is buzzing about the exciting and wonderful llama market boom we are having. No matter where you go, people are talking about the exciting growth in the llama market. Television commercials play every few minutes with some guy proclaiming, "I expect llama prices to go to $200 in the next few months!" Other wiser and more even-tempered llama analysts warn that the current market is overpriced and the llama "bubble" will burst soon. "Llama prices will fall dramatically", they say. In fact, some even predict that the llama market could collapse completely.
Fred just smiles, and staying true to his original plan, he purchases one more in January.
But then February brings bad news for the llama market. Apparently somebody mixed some risky armadillo futures with some unstable alpaca loans and sold them to investors on the llama market. In a "crash" that happens almost overnight, the price for llamas has plummets to a mere $5 each.
Everybody's herd is now worth 1/20th of what it was in December and January. Now, most llama ranchers would be jumping out of windows at this point, but Fred is undaunted and remains focused on his goal of becoming a llama mogul. He takes the $100 he budgeted and buys several more.
In March, the price has recovered a little bit, but the llama market is still looking bad. Llamas are only selling for $10 each. "Onward!" Fred declares, and he spends another $100.
April rolls around and the llama market has improved a little more. Llama prices have risen to $20 each, so Fred buys some more to add to his growing herd.
Now it's May. Fred has had enough. Those llamas are tearing up the place and they are really smelly, so he decides to RETIRE and sell the whole heard. The problem is that the llama market still hasn't returned to those glorious "Boom Market" prices of last November, December and January. Right now Fred can only sell his animals for $25 apiece. Remembering those glorious days of $100 llama prices, Fred sighs. "Oh well," he thinks. "You can't win them all." So off they go to be sold.
Then Fred gets his check from selling the llamas. Wait a minute! "I made a profit?" Fred exclaims. How'd that happen? Let's take a closer look:
Over a six-month period Fred spent $100 each month purchasing llamas for a total cash outlay of $600.
Fred purchased llamas at various prices.
In May, Fred sold his 39 animals at $25 each for a total of $975. Subtract the original $600 investment, and Fred walks away with a tidy profit of $375.
Congratulations! Fred has discovered the power of "Time and Consistency" coupled with the principle of "Llama Cost Averaging". (Dollar Cost Averaging)
Legal disclaimer: No llamas were hurt or injured in writing this story. This article is for educational purposes only and is not a solicitation to buy, sell, or transact any type of investment, (llama or otherwise).
