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How
to Make Big Money Safely
In
Stock Market
by Henry
Lu
(1) Stock Market is Tough
Place to Make Any Money Consistently
NASDAQ or SP&500 averaged about -6% per year for 5 years between
1999 and 2003. Many individual investors who made killing in the
internet bubble period got wiped out during those 5 years. Many who
trusted Wall Street experts by investing their life savings into mutual
fund
had rude awakening after the huge loss and scandals in many of the
famous fund names.
Numerous academic studies have shown that more than 90% of mutual funds
failed to beat market over the long run and that more than 90% of
individual investors lost money in the stock market. Too many
people and too many Wall Street experts or
mutual
fund managers are buying and selling stocks like madmen, with no
sound
strategy or any hope of long term success. Ironically, they're
the ones who create opportunities for prudent, long term oriented
investors.
To be successful in stock market, you either have to become an expert
yourself or to seek help from real successful experts. Stock market is
such
a brutal place that there is no room for half-expert or expert
pretenders.
The truth is that only a small percentage of disciplined
and experienced people earn disproportionate huge amount of return,
many times at the expense of the rest. It is an insult to "Wall
Street expert" professional title when so many of such "expert
pretenders" failed to beat index or merely stay break-even.
(2) Majority of huge
performance claims in Ads by "Experts" are not real
Too many investment newsletters or hot mutual funds touted their huge
past performance and went into disaster later on. Who do you
believe? I have been in this stock market long enough to know
that majority of their claims are not "real". I will tell you why below.
The first reason is simply due to "cheating". Let's be honest about
many Ads. Many of them do not tell the whole and true story of their
performance. For example, they would tout huge percentage of gains for
certain winning stocks and hide the losing stocks. If you look deeper
into their whole portfolio performance, their portfolio
performance was not impressive at all. Many investment
newsletters will have multiple portfolios in publication. In their ads,
they will only mention the performance of the winning portfolio and
hide the losing portfolio. The problem with multiple portfolios is that
when you subscribe to their newsletters, you would not easily know
which
portfolio out of many will have best performance in the long run.
Which portfolio do you follow? Most important of all, which portfolio
out of many does the newsletter author invests for his/her own
money? If the newsletter author or the mutual fund manager does
not invest into a portfolio himself or herself, how would you trust
their services?
Even if past performance of a newsletter or a mutual fund was
pretty good, it may not indicate good performance in the future. Many
hot technology mutual funds jumped up 100% or more in the 90's and
dived to their
death after 90% to 99% of loss. Certain investment methods such as
growth stocks investing are known to be risky. Momentum investing
or day trading methods are known to be extremely risky methods that can
wipe out life savings over night. There is simply no free
lunch. While a risky method can produce fabulous gain in relative short
term, over the long run, a risky method is more likely to make
people poorer rather than richer even if a short term gain was
gigantic. Gigantic short term gain is just a dangerous stock market
trap to lure the inexperienced people into the market. Dreaming for
instant satisfaction of huge short term gain overnight with speculation
is just a recipe for disaster ahead.
(3) Value Investing is the
Only Proven Safe Method
Value mutual funds are well known to have lower volatility than growth
mutual funds. Numerous industry and academic studies have shown that
value stocks as a group performed far better than
growth stocks in bear market. Many technology and internet so called
"growth stocks" lost 90% to 99% of value in just a couple of years
after 2000 while many value stocks went up during the same time frame.
In fact, the single most important element
to obtain high investment performance over the long run is to maintain
MARGIN OF
SAFETY of a portfolio. That is why the greatest investor Warren Buffett
once quote "Rule No.1: Never lose
money. Rule No.2: Never forget rule No.1.".
(4) Value Investing is the Proven Method to Make Big Money in the Stock Market
I know that I'm going to catch a lot of flak for saying this, and that
many people will misunderstand what I'm saying. There are certainly
other methods of investing or trading, which made people rich. There
are certainly many under-performing value mutual funds, which give
people wrong impression that value investing is equivalent of low
performance with less risk.
However, I want to emphasize that in fact value investing is investment
style that can obtain high performance with less risk. I want to stand
by my above statement for the following
reasons:
- In the early years of my investment career, I
have
studied
and tried all kinds of well known methods of famous investors or
traders, Short term trading, Momentum trading, Technical
Analysis,
CANSLIM, growth stock long term buy and hold, Random Walk theory,
etc. I have been there and I have done there. Evidenced by my
past investment performance, value investing is the only method
that
delivered gigantic investment return consistently for me over past many
years.
In 2003, I have made more than $150,000 in stock market with value
investing method. In 2004, I have made even more money than 2003 so
far. With the power of compounding, there is really no upper limit for
the investment profit with value investing.
- In 1984, Warren Buffett gave a speech titled The
Superinvestors of Graham-and-Doddsville, which categorized
performance of many famous value investors who beat market year
in and year out. Many of people mentioned in this article are legendary
multi-billionaire right now. It is true that only a small percentage of
investors
can beat market consistently. However, it is not by chance at all that
so many of students of Benjamin Graham became super riches in America
while other methods have not produced that many rich people. It
is also not coincident at all that the second richest person in the
world is a value investor named Warren Buffett,
a student of Benjamin Graham as well.
(5) Value investing will not distract your regular job
The nicest thing about value investing is that it will not distract
your regular job if you choose not to stare at the stock market
frequently in your office. In fact, it is quite healthy to forget about
stock
market in your office and worry about that only at your home after
work.
Many newbies in the stock market still believe that if they stare at
stock price quote closely, they can obtain better chances of
winning. It will not. Staring at the stock quote is least
important part of this game. In fact, staring closely at the stock
price quote is more likely to create a loser rather than a winner
because of greed and fear in the stock market. The more one is
unable to resist the mad mood of Mr. Market, the more likely one is
unable to invest successfully with value investment method.
I am not saying that successful value investing does not require time.
The time you will need in value investing depends on the investment
vehicle you utilize. If you invest with a value mutual fund, you
will not need much time in stock market and you only need to follow up
quarterly with your fund's performance. If you are a passive
investor of my investment newsletter Blast
Investor Real-time Plus and you follow my model portfolio
passively, you will only need to pay attention to my infrequent trade
alert
closely and read my newsletter issues every 2 weeks. If you
invest by yourself, you will certainly need hours of time every
week to look at hundreds of value stock leads and do your own due
diligence by reading 10Q or 10K SEC filling, or by listening to
conference calls, or by talking to company's management.
(6) Successful Value Investing is Hard, But You can Do It!
I certainly do not want to make you to believe that value investing is
as easy as reading couple of books. Value investing not only
requires tons of knowledge and expertise in financial analysis,
accounting, US
tax law, US bankruptcy law, etc., it also requires real life training
of right psychology to fight against greed and fear in the stock
market.
It is hard to do.
However, successful investing certainly can be done and I have
done it over past decade myself. You certainly want
to look at my investing articles of this web
site for more information.
(7) You need to start early in value investing
Let's be honest about value investing, it is not a get-rich-quick
scam and it takes time to really make living with value investing
without need of your regular job. You need large starting
principle if you want to make living from stock market investment
than your salary.
By reading Warren Buffett's article above, you can pretty much guess
that successful value investors can achieve 20% to 30% per year
performance consistently over the long run regardless of whether
market is bear or bull although it is possible to
obtain significantly higher performance in earlier investment years due
to smaller fund size and luck. 20% or 30% more consistent
investment return is already very high return over the long run. Since
Peter Lynch retired from Fidelity, you can rarely find a mutual fund
with that kind of performance over past many years.
The best approach is to treat stock market investment as side business
in addition to your regular job. Your regular job help you pay
your bills and help you earn the initial principle for value
investing. Once your investment net worth surpasses $100,000,
sooner or later you will realize that your regular job salary can
hardly keep up with compounded rate of investment return. Too
many people naively believe that they can get rich quick with
speculative trading method in stock market rather than a hard work with
a job and value investing at side. It is a
lot easier to make your first $50,000 net worth with a job rather than
speculation in stock market.
Even if you do not have large sum of money right now as principle to
make really big profit out of value investing, you still want to start
value investing early so that you can learn in and out of value
investing in your earlier years of investing in the stock market.
Successful investment is long term process. The earlier you start
investing successfully, the better off your pocketbook will be, and the
quicker you will reach your financial freedom. Let's do a quick
math, if your starting capital for investing is $50,000 and your
annual compouned rate of return is 30%, you will need 9 years to
surpass $500,000 net worth. However, to turn $500,000 net worth into 1
million, you only need 3 more years, think hard!
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* Article
by Henry Lu of BlastInvest LLC, a premium investment newsletter
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