Searching for the Holy Grail of Stock Picking
Twice a year, I count my money.
It’s a morally deplorable habit, I’m sure. But it’s an integral part of a wealth-building system I developed over the years that has never failed to give me less than a 9% return on my money.
Most years, my bad habit motivates me to do better than that. Sometimes, much better. But I’ve never done worse. And that fact has given me comfort – particularly during times when friends and colleagues were losing money.
People like to brag about their financial successes but are often mute on their failures. Because of this understandable aspect of human pride, they seldom tell you just how much money they have lost. But if you listen between the lines, you can guess. Judging from what I’ve heard, most of the friends and colleagues I know well lost between 30% and 70% of their savings during the stock market washout of 2000 to 2002.
That’s a lot to lose – and it’s a very tough loss to recover from. Losing half your nest egg means you have to get a 200% return on your money to catch up. Losing 70% means you’ve got to achieve a return in excess of 300%. In my experience, returns like these are sometimes (though rarely) possible with individual stock picks – and pretty much impossible with an overall portfolio of stocks.
But here’s the good news: If you have a decent amount to start with and are willing to wait a while, you don’t need huge returns to acquire a considerable amount of wealth.
The other night, after completing my semi-annual net worth calculation, I decided to see what my family fortune would grow to by the time I hit 65 (in 11 years) and 75 (in 21 years). I used three scenarios: the 9% I got last year, the 17% I’ve been averaging for the past 10 years, and the 5% I figure I could get even if most everything went bad.
What I found surprised me. The difference between 5% and 9% is astounding. And the difference between 9% and 17.5% is almost ridiculous.
Rich-Rich Friend, Rich-Poor Friend
I thought about what this could mean to two friends of mine, one who’s worth $25 million and another who’s worth a mere $2 million.
If my richer friend gets a 9% return, I calculated that he’ll be worth $59 million in 10 years and $140 million in 20 years. If he gets a 17% return, he’ll be worth $120 million in 10 years and $578 million in 20.
For my poorer ($2 million) friend, the numbers work out this way:
At 9%, he’ll have $4.7 million in 10 years and $11.2 million in 20 years. At 17%, he’ll have $9.6 million in 10 years and $46 million in 20 years. Not bad.
But what if you aren’t worth $2 million, let alone $25 million? What if your net worth is only $200,000? Or less?
If you are worth $200,000, the arithmetic is easy. At 9%, you’ll be worth $470,000 in 10 years and $1.1 million in 20. At 17%, you’ll be worth $960,000 in 10 years and $4.6 million in 20.
What Does This Mean to You?
1. First and most importantly, if you want to get rich by investing, it helps to start with a big pile of money. The bigger the pile you start with, the better. If you don’t have a sizeable sum of money to invest right now, don’t count on any sort of investment scheme – including the stock market – to make you wealthy. Instead, spend your time and energy boosting your income.
I cover this subject extensively in my book “Automatic Wealth”. If you aren’t rich now and don’t have a copy of the book, get one, read it, and pay special attention to what I say about increasing your income (and how to do it). If you don’t increase your income – significantly and fairly soon – chances are very, very slim that you’ll ever have the wealth you want.
2. Second, the “miracle” of compound interest doesn’t really become miraculous until a long time has passed. Most get-rich books that tout saving and investing (and that means most of them) use 40-year appreciation schedules to demonstrate how well compound interest works. If you don’t have 40 years to wait – or even the 20-year timeframe I used above -again, you can’t count on merely investing to create wealth. (Go back to “Automatic Wealth.”)
3. Third, if you are starting with a reasonable nest egg – or will have one soon -the return you get on your investment makes a big, big difference.
4. Fourth… you don’t need huge returns to get rich. The stock market average of 9% will work nicely over a 20-year period. A 17% return will work wonders in as little as 10 years.
If you’re a long-time reader of ETR, you know that I’m somewhat skeptical when it comes to stock investing. And it’s not just because I’ve been an inside observer of the stock advisory and promotion business for 25 years (and have seen the shenanigans). It’s also because I’ve had an interest in a few public companies myself, and have seen firsthand how stock prices can be affected/manipulated.
Most importantly, as a businessman, I understand how difficult it is to understand my own business – so I’m very reluctant to believe I can understand someone else’s business well enough to make a solid assessment about its earnings potential. And I know that even if I could predict a company’s earnings potential, that would give me no guarantee that its share price would reflect that in the future.
All that said, I do believe in stock investing – because I know I can get richer by investing in stocks than I can by investing in bonds. For almost 100 years, in fact, the stock market, on the average, has given investors the 9% that I aim for as a minimum return on my money.
I know too, from being on the edge of the investment advisory business for so long, that some stock pickers do considerably better than that 9% average. Several have earned in the 10% to 15% range over long periods of time (10 to 20 years), and a rare few have earned in the 15% to 20% range.
Based on studies done by analyst-tracker Mark Hulbert, it’s clear that most stock advisors under-perform the market. Out of 19 that he began tracking in the mid-1980’s, only four had portfolios that have outperformed the S&P 500 Index.
However, for any given year there are always SOME who beat the market – and sometimes by a considerable margin. Judging from Hulbert’s work, it seems fair to say that, though few do it, it is indeed possible to achieve long-term 15%-20% returns. But everything has to go just right.
But What If… There Were a “Holy Grail” of Stock Investing?
As I said, I’ve personally averaged about 17% on my investing over the past 10 years. But I didn’t get that return by getting a 17% return on my stock investments. My stock investments averaged less than 9%. (In fact, they actually under-performed the market average, because I occasionally violated my rule of staying with index funds and messed with individual stocks – a big mistake for someone like me, who doesn’t have time to do it right.)
Lucky for me, stocks have always represented a small (about 5%) share of my investment funds. I’ve made up for their relatively poor performance by getting superior returns in private placements and real estate.
But what if I could get 17% on my stocks? What if I found a stock-picking system that could give me that kind of return consistently over an extended period of time?
What if I could find an investment advisor I trusted who had a system that made sense to me as a businessman, as well as a demonstrable track record of producing 17%+ profits?
If that were the case, I’d start investing a lot more than 5% in stocks.
As it happens, I’ve found just such a system. It’s the perfect program for conservative – even skeptical – investors like me.
Ever since I started writing ETR, people and friends interested in the stock market have been challenging me to come up with a system like this. So I’ve been working on a program (with a very brilliant guy) for about a year now.
The program combines what I know about evaluating a business with what the two of us have discovered about successfully investing in stocks… along with a few ideas of mine about the way businesses really make money.
It’s the only system I have found so far that not only gives you an idea of what a stock might do if past performance repeats (as the SEC reminds us it sometimes doesn’t) but also indicates what will probably happen based on what the company is actually doing now.
It’s not a system that looks backward to annual reports and then projects forward, assuming things will stay the same. It looks at current conditions, compares them to the past, and then conservatively predicts whether past performance can be expected to continue – or, if not, just what is likely to happen.
It’s a great system. A sensible, business-oriented, time-tested system.
Tomorrow, my colleague – the fellow I’ve been working closely with on this system – is going to tell you all about it.
[Ed. Note. Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]