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By
Order is Heaven's first law.
You now have eight of the eleven steps of investing in Rule Maker stocks under
your belt, and you're either feeling refreshed, bored, or confused. We'll
try our best to keep the remaining few sharp and snappy.
You're now charged with putting together all that you've learned here. In
the mish-mash of chatter about investing in healthy businesses, about paying
down your short-term credit-card debts, about what to look for on a balance
sheet, and about why investors should be looking to tightly control their
commission costs, hopefully some general themes are emerging from the mist.
I'll try to restate a few of them here.
A. Invest what you don't need now.
This makes particular sense here at the start of the 21st century, after five years of extraordinary gains for the U.S. stock market. Whereas history has shown a long-term annual rate of return of 11% for stocks, the period from 1995-1999 has brought in excess of 26% yearly growth for the S&P 500 and 40% annual growth for the Nasdaq. Incredible. If you are borrowing
money now to buy stocks or you are investing what you'll need in less than
3-5 years, you're playing a game that speculators in decades past have been
ruined by. If you need the money in the next 36-60 months, we don't think
you should be investing it in stocks.
B. Buy companies, not stocks.
It does continue to amaze us how many bright minds out there remain steadfastly
committed to worrying about the valuation of the overall market or today's
price-to-earnings ratio of a particular stock. Attempts to nail down a fair
price for shares of stock in the short-term, we think, are futile. Why? Because
in the short-term, irrationality and emotion rule the marketplace. The guy
who gets to see himself on financial television regularly has more of an
effect on today's pricing of the stocks he mentions than he should. Instead
of buying paper stocks, buy an ownership slice of a business that you'd like
to follow for many years.
C. Focus on What Everyone Knows
Why do first-time investors buy so many low-grade promotional businesses
with stocks trading under $3 per share and products that the investor has
never seen? Why? Because for many, the stock market seems a gamble. They
feel they have a low chance of winning, so they figure they might as well
bet on the long shot and win big if they're right. What a shame. Throughout
this century, the very best investments have been those that are clearly
visible to the masses of Fools in America. Gillette. Johnson & Johnson.
Microsoft. Campbell's Soup. We think investors should stop gambling on what
they don't know, and start owning what they do. It could make all the difference.
D. Play the Overdogs
Playing the Rule Maker game is like rooting on proven winners in the world
of sports. For three decades, Dean Smith led the North Carolina Tarheels
to one ACC Championship after another. Coach Smith had built a logical, durable
plan for creating winning teams, year after year. Just as he built an
organization for long-term success, so too great businesses plan on growing
for 10, 20 and 30 years, rather than trying to announce great earnings for
a few consecutive quarters. We suggest that for the bulk of your portfolio,
you look past the underdogs and concentrate on time-tested, proven winners.
E. Let Compounding Work its Magic
Let's say you invest $10,000 into stocks this year. Let's then imagine that
the market climbs 10% and your portfolio meets market growth. You just made
a thousand bucks (before taxes). Awesome! If the market does the same in
year two, you'll make another $1,100 (a hundred bucks more than last year).
Fantastic. But don't get too excited. Because while you can earn some denarii
on the highly-unpredictable short-term growth of the market, you stand to
make so much more looking out decades ahead. Consider this table.
Wheras in the sixth year of this portfolio, you'd make $1,610. In the 51st
year, you'd make $120,000. In the 101st year, you'd make $13.8 million. By
leaving your money in the market, by generating long-term positive returns,
your portfolio will grow much more quickly twenty years from now than it
will today.
F. Aim to Learn
You can make no greater committment to your future (and that of your kids
and theirs) than to concentrate on learning more and more about the stock
market. Rather than rush in blindly, turning trades willy nilly, and trying
to triple your money in the next five years. . .instead, focus on learning.
Study how businesses fit into society, how managers encourage and motivate
their employees, how companies turn profits, and which investments have proven
phenomenal in decades past. By reading a handful of books on the subject,
and by asking as many questions as you can on our web site, you'll be
dramatically improving your chances of both beating the market over time
and enjoying the process thoroughly.
Ok, there are six basic principles from Rule Maker investing. There are certainly
many more. Please feel free to drop by the folder and share a few of yours.
Step 10: A Rule Maker Retirement »
-- Alexander Pope
Initial
Investment Growth 5 Years 20 Years 50 Years 100 Years
$10,000 10% $16,105 $67,275 $1.2 m $137.8 m