A Llama Story

You decide to start a llama ranch. Your plan? Spend $100 each month buying as many llamas as you can until you get a large herd. This month llamas cost $50 each, you have $100 to spend, so you by 2 llamas.

It’s December now, time to buy more llamas. The llama market is just booming and llama prices have gone up. They cost $100 each now. January rolls around and llama prices are still at $100 each, and everyone is talking about the exciting and wonderful llama market boom we are having.

But then February brings bad news for the llama market, and in an crash that happened almost overnight, the price for llamas has plummeted to a mere $5 per llama. Everybody’s llama 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 you are undaunted and remain focused on your goal of becoming a llama mogul, so you use the $100 you budgeted to buy more llamas.

In March, although the price has recovered a little bit, the llama market is still looking bad. Llamas are only selling for $10 each. “Onward!” you declare, and spend another $100.

April rolls around and the market is looking better. Llama prices have risen to $20 each, so you buy some more to add to your growing herd.

Now it’s May. You have had enough. Those llamas are tearing up the place and they are really smelly, so you decide to RETIRE from the llama business 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 you can only sell your llamas for $25 apiece. Oh well, I guess you can’t win them all, so off they go to the market.

Then you get your check from selling your llamas. Wait a minute! You made a profit? How’d that happen? Let’s take a closer look:
Over a six-month period you spent $100 each month purchasing llamas for a total cash outlay of $600.

You purchased llamas at various prices.

      Month         Cost                # of Llamas
                         per Llama        purchased
       Nov           $  50.00                 2
       Dec           $ 100.00                 1
       Jan            $ 100.00                 1
       Feb            $    5.00               20
       Mar           $  10.00               10
      April           $  20.00                 5

Total number of Llamas purchased: 39

In May you sold 39 llamas at $25 each for a total of $975. Subtract your original $600 investment, and you walk away with a tidy profit of $375.

Congratulations! You have just discovered the power of “Time and Consistency” coupled with the principle of “Dollar Cost Averaging”.

(Legal disclaimer: No llamas were hurt or injured in writing this story)


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