Dollar cost averaging seems to be a hot topic within the industry of late. For those of you who may not understand this concept, it basically means that you continue to buy more shares in companies that you already own as they fall away in price in order to achieve a lower average purchase price. Now I don’t know about you, but I struggle to understand why anyone would want to buy shares in an asset that is falling.

If you dollar cost averaged Centro and ABC Centres in the past 6 months you would most  certainly be questioning whether this was wise given both that shares had already fallen significantly prior to the recent falls. I am sure those who employed the dollar cost averaging strategy to Telstra as it fell 62% over 6 years from $9.20 to $3.43 would still be regretting their decision as they could have made far more money in many other shares during this time.

In my opinion dollar cost averaging or buying shares as they fall away because they seem cheap is not smart investing for the simple reason that most investors do not know where the bottom is and to buy without knowing is speculating.

So what can we expect in the market?

Just when I thought our market was settling and would confirm a direction soon, it has once again behaved erratically, and fallen away over the past week. This erratic behaviour makes it very difficult to determine the short term moves in the market, although as I mentioned last week I believe the medium to longer term will be bullish. The only question that remains is when this will occur.

There is a high probability that the next bull-run will commence before the end of June and when it does it will produce some great gains in many top shares. In the short term we need to be patient as it is possible the market will pull back to the low of 5222 that occurred in January although there is a small possibility that it could also fall to around 4800 points. That said I believe the market will start to rise over the next one to two weeks, which if correct could be the start of the new bull-run. Again it pays to be patient because right now is the perfect time to ready yourself to enter the market when it does confirm a direction.     

I have said it before and I will say it again, it seems that we fail to learn from our past mistakes. One of the biggest issues I find continually perpetuated in our industry is the use or overuse of leveraging to invest. In January of this year the market experienced record levels of margin lending calls, which was also prevalent 6 months earlier in August 2007 and again 12 months prior in June 2006. 

This week the share price of ABC learning centres was decimated as a result of the company’s over use of debt, and the share holders are paying dearly. While borrowing to invest is a valuable tool for investors and businesses alike, it needs to be made very clear about the downside of using this facility. In my opinion, investors should not be allowed to borrow up to their limit and there should always be room for fluctuations in the market in case the worst occurs. If this were to happen, then margin calls could become a thing of the past.         

So what can we expect in the market?

Last week I mentioned that I was expecting some direction in the market very soon, and it appears as though it may be rising given that during three of the last four days the market has closed higher, with the All Ordinaries Index reaching its highest level since earlier this month. That said, the market fell away yesterday and it is quite possible it will continue down today although I don’t expect this down move to be strong or to last too long.

For the market to prove it is bullish, at least in the short term, we need to see it rise above 6057 points in the next week, which is a strong possibility given what has occurred this week. If it does rise to this price level, it may indicate we are starting the next bull-run.

While my bias is beginning to swing from being bearish to bullish in the short term, investors still need to be patient and to be sure of the market direction before making any investment decisions. Given the erratic nature of our market over the past few months, in which anything could and did happen, we need to be prepared in case the market does fall away.