2 Simple Ways to Beat the Market! The Avalanche Effect and Marriage

Getting no interest from your savings? Eager to invest but don’t know where to start?

Ok you are here and off to a good start.

Let me show you 2 Simple Ways to Beat the Market!

Have you ever been baffled by a restaurant menu because they are way too many choices? This is due to analysis paralysis. How can you stop analysis paralysis?

Confusing-Menu-660x471

It’s the same for investing, you might have heard some friends investing in stocks, funds, properties or even coconut!! With so many different investments to choose from, what should I invest in? Where should I start?

Here are the 2 simple ways to beat the market:

1) Regularly Invest in Index Tracker Fund

Screen Shot 2015-07-28 at 18.35.09

What the graph above shows is if you invested £100 at June 2005, depending on the index fund you invested in, you end up with £200 (FTSE 100) or £300 (FTSE 250) in June 2015. The only time you would have less money than what you invested in is if you sold during 2008-2009 period. Hence I could never stress enough:

BUY and FORGET. DON’T SELL IN PANIC!

Granted yes, the returns are not impressive approx 7~12% per year. It’s definitely better than banks and inflation (for developed countries).

This strategy is also applicable for US indices like S&P500, Nasdaq100, Dow Jones Industrial Average

Not in US/UK? You could still invest in the trackers mentioned. There would be currency fluctuation. However it should balance out over time as US/UK are mature markets. Think of it as your holiday funds when you visit New York/London.

What about your local market indices? It depends.

Shanghai Composite Index is quite volatile, whereas Australia S&P/ASX 200 is quite similar to US/UK indices.

The AVALANCHE Effect (The power of compounding interest)

snowball-your-trading-success

Ever tried rolling a snowball down a slope? It just get bigger and bigger… When it’s heavy enough, it’ll start rolling downhill and I hope noone is at the bottom of the slope!

What has it got to do with investing? That’s how the £100 invested becomes £300 by the end of year 10.

Yes if you are fortunate enough to have a lot of spare cash at hand, invest in an index tracker and forget about it, you’ll end up with a surprise windfall when you look at it 10, 20 or even 50 years later.

£1000 invest with this simple method today could be £30,000 or even £290,000 in 50 years time. Remember Time is your friend in investing.

What if you don’t have a lot of spare cash now?

Here’s two magic word that could boost your return: REGULARLY INVEST

avalanche-1If you invest a regular amount of £100 per year for 10 years, you’ll end up with roughly £1400 at the end of year 10. That’s 40% total return.

That’s pretty good, but remember the £100 you invested in year 2 has only 9 years to snowball. The £100 invested in year 10 only has 1 year, so it is still a small snowball. The aim of the game is to create lots of snowballs so they would form an avalanche

time is your friend in investing

If you have invested long enough, you’ll reach a point where the growth of your portfolio could potentially be as much as your annual paycheck. That’s when you realise you created your own avalanche.

But why Index tracker funds you ask?

The main reason is they are low cost compare to other funds. Therefore the returns are amplified over time.

What about Actively-Managed funds?

The short answer is there are not many Warren Buffet out there. Based on performance over 40 years, only 12% of the actively managed funds beat the market.

2) Regularly Invest in Great Companies

95% of my investment portfolio consists of companies. Are all of them great??

No.

But my 15 greatest company holdings form 80% of my portfolio value. (I own about 60 companies)

How did that happen?

Investing in Great Company is like a Marriage.

Courtship: This is the getting to know phase. Do your research, understand the company (no pun intended). Take your time. Being comfortable with your new company is important as it could be a lifelong journey. If it’s not the right one, there are plenty of candidates out there.

Engagement: You propose! Here is where it gets interesting. Seed funding, you like your company. So you invest a set amount to show your commitment (the ring??). With all being well, you move on to the next stage. If not, you could reevaluate whether your initial thesis is still valid (Is he/she still the right one?). You might lose a bit of money and pride, but I think it would be better than long term pain.

Marriage: You commit! You understand your company a lot better and you know it has growth potential. Regularly invest in your company and see it grow. Sure there are good and bad quarters over the years, but you should stick through thick and thin (aint that in your vow?). If your investment thesis is still valid, 1 or 2 missed earning quarters is just a short term blip and it’s a great opportunity to invest more. Your company would reward you well as time passes and you would be glad you chose to stick with it through tough times.

What happen if you skip the Courtship and Engagement phase and went to Marriage straightaway? 

You might be lucky to find the right One or you end up getting a divorce and lose part of your fortune in the process.

Screen Shot 2015-07-30 at 12.31.31Till Death To Us Part?

I am sure all of you know Netflix. Have a look at the Netflix chart (post share split). 2011 seems like a great year, till it dropped from $40 to $10 and maintaining around there till 2013. Netflix focused it’s strategy on online streaming then which caused the concern as it moved away from it’s DVD delivery service.

Are we going to stop watching TV show/movie at home? Obviously not.

If you stayed faithful and continued to regularly invest in it, your returns could easily be more than 1500%.

Not every company would be like Netflix, voluntarily disrupted it’s own cash-making business (Remember how Kodak became complacent and not joined the digital camera trend), and Netflix might be disrupted by newcomers if it fails to innovate in the future.

Bottomline is review your investment thesis periodically, if it is still valid, the short term earning blips are a blessing in disguise. Keep investing!

Disclaimer: I do not encourage polygamy or multiple partners. This is just an analogy. 

Over time I keep investing in my top conviction ideas and these companies continue to grow, hence 80% of my portfolio value is contributed by 25% of my company holdings. It agrees with Pareto Principle, and I too focus most of my attention on these companies only.

To Recap

1) Regularly Invest in Index Tracker Fund:

Let the Avalanche effect do the job. I recommend the following indices:

FTSE100, FTSE250

S&P500, NASDAQ100, DJIA

2) Regularly Invest in Great Companies

Marry” the right companies. Let the Avalanche effect do the job.

How to find the right companies?? Over the next few weeks, I will write about the characteristic of Great Companies and how you could identify them. Follow the link if you have missed the Ultimate Guide to Invest Successfully Introduction Series.

Ready to invest?

Open an account with reputable Discount Brokers to keep your cost low. This would maximise your return.

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