Constant Value Investing With Virtual Shares

It is possible to boost the performance of Constant Value Investing by using virtual shares to magnify the buys and sells.

This technique makes my system more complex and risky.

I'm presenting it, because I want you to have a lot of options, so that you can develop your own individual system to suit your needs and tastes.

Personally, I think regular constant value is good enough - so, I don't use virtual shares.

I don't even mention virtual shares in my book, Stock Trading Riches, which is available on Amazon.com.

I purposely left it out, because I wanted to "KISS" my book - keep it small and simple. I wanted my readers to learn the exact system I use. I have made double digit annual returns for years without using virtual shares.

With that note / warning, here is how it works:

Let's use the example of a stock that starts at $10/share. It goes to $6, then $12, and then back to $10.

First, let's pretend that we had $4,000 and decided to invest $2,000 in the stock, and follow the normal rules of constant value investing (We maintain $2000 in the stock, no matter the price).

We would initially buy 200 shares at $10 and have $2000 in our cash pool. Then, at $6, we would buy 133 more shares. We would sell 167 shares at $12. Finally, we would buy 34 shares when the stock went back to $10. At this point, we would have 200 shares and $2,866 in cash, for a total of $4,866. We made 21.65%.

Now, we will see what would happen if we used virtual shares. Again, we start with $4,000 and initially invest $2,000. So, we have 200 shares at $10 with $2,000 in cash.

But, we will define a virtual constant value of $6,000. At $10/share, this "gives" us 600 virtual shares. So, now we actually have 200 shares, but 600 virtual shares.

When the stock goes to $6, we divide 6000 by 6, and get 1,000 virtual shares. Since we "had" 600 virtual shares and now have 1,000, it means we had to "buy" 400 virtual shares. So, we now buy 400 actual shares. so we now have 200 + 400 = 600 actual shares. Compare this to when we used the normal constant value investing, where we bought 133 more shares.

Because we only have $2,000 in cash, and 400*6 = $2400, we actually have to add $400 to our account. So, now we have invested a total of $4400 instead of $4,000.

At $12/share, we divide 6000 by 12 and get 500 virtual shares. Since we had 1000 virtual shares, it means we now have to sell 500 shares. So, we go from 600 shares down to 100 shares. Recall that, under regular constant value, we had sold 167 shares, and had 166 shares left.

Finally, at $10/share, we divide 6000 by 10 and get 600 virtual shares. Since we had 500 virtual shares, it means we have to buy 100 more shares. So, we go from 100 shares back to 200.

We end up with 200 shares and $5,000 in cash, for a total of $7,000. Our total investment is $4400 instead of $4,000. We made 7000/4400 = 59%.
So, to summarize:

Under regular constant value, we went from 200 shares to 333 to 166 to 200.

Under virtual shares, we went from 200 shares to 600 to 100 to 200.

You can, of course, vary the virtual constant value to make it as risky as you want. For example, if we used a virtual constant of 4000 instead of 6000, it would reduce the risk. If we used 12000, it would greatly magnify the movements.

P.S. You can read more information about my book (including testimonials) here.