As I wrote yesterday how I enter stock positions, today Lorillard once again shows the example of why I like to time the entry into a stock. It is not necessarily timing the market, just timing the entry point, or buy point. Once I decide to to buy more shares I watch the stock carefully to see when I can enter and increase the profitability of the trade.

As you can see from the chart above the stock fell yet further down today. If you perform automatic investing and invest into stocks on regular basis but without waiting for the right entry point, you could buy your holdings when they price was high and as the stock reverses, you would be sitting on a losing position. For example, if you bought on Thursday last week (February 21, 2013) you would buy at $42.30. At today’s price, you would be down almost 6%.

Sometimes recovering such loss (even unrealized) may take several months.

I wanted to know, what difference entry timing can make to my investment. For that I created a hypotetical situation comparing a regular investing vs. entry timing. Let’s assume an investor A invests regularly every 1st day of a month and every 15th day of a month and buys 100 shares of Lorillard. Investor B, on the other hand is waiting for the price but buys more shares (and I adjusted that to be able to compare the results) but both investors had a plan to buy 800 shares in total. See the table below:

The result is staggering 2% difference. Both investors bought 800 shares, but the investor B spent $714.00 less than investor A. In a long run of 20 years, this difference can grow in a very significant gain on top of your dividend income as well as it may impact your dividends, because savings can be used to buy more shares.

That’s seen in the table below, where I assumed the investor A and investor B decided to invest a same amount of money:

Both investors had $24,000 available to invest and the investor A invested on regular basis 3000 every 1st and every 15th day of a month. Investor A invested all his allowance and was able to buy 609 in total. Investor B didn’t spent all his allowance yet, since the timing method didn’t trigger more buy orders yet, but if we assume, that he would be buying at average price $38.52 a share and realizes the two other missing trades, he would be able to buy 623 shares instead of 609.

In case of Lorillard, 14 more shares would bring the investor B $30.8 more in annual dividend than what the investor A would receive.

And lastly, let’s take a look at my current history of my contingency orders:

On February 22, 2013 I entered the following order:
If the last of LO is greater or equal to 41.77 Buy 24 LO at limit $41.77

On February 25, 2013 I lowered my order down as the price of LO dropped:
If the last of LO is greater or equal to 41.26 Buy 24 LO at limit $41.26

Today, as the price of LO dropped even lower, at the end of the trading session, if the price stays at 40.14 a share, I will adjust to the following:
If the last of LO is greater or equal to 40.65 Buy 24 LO at limit $40.65

The trade executes on Wednesday only if Lorillard recovers and grows above $40.65. What a difference buying at 40.65 instead of 42.30 just few days ago!