Fortune Watch

It takes time, sacrifice and consistency to join the million-dollar club

Quit fantasizing about marrying a millionaire, winning the lottery or walking off with a TV-quiz-show jackpot. By making your money work harder and smarter now, you can become a millionaire by the time you’re ready to kick back and trade work for play.

There’s no magic involved in reaching the million-dollar mark. If you set goals, do the research and start investing now, you can hit your wealth-building target on schedule. And you don’t have to be a financial whiz! What are needed are time, sacrifice and consistency.

Time is most significant: The longer you invest, the smaller the amount you need to put away each month to reach $1,000,000. Thus the younger you are when you start investing; the younger you’ll be when you join the million-dollar club. Many of the estimated 8 million millionaires began investing in their teens, and always with a long-term goal. Let’s say you’re 28 years old now, with no money saved or invested and would like to have a million-dollar portfolio of investments by the time you turn 60. You will need to invest $300 a month in stocks or stock mutual funds that have at least an 11 percent annual rate of return. If you increase your monthly investment to $500, you’ll hit your mark by age 54.

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The other day I read about someone who claimed to have doubled his investments every month for more than a year now. If I do the math’s it turns out that this man must have multiplied his money to more than 4,000 times what it was. That’s 4,000 times, not 4,000 per cent. The interesting part is that not only do such people expect to be believed; there are those who believe them. If you ask a random collection of people whether they think it possible that somewhere in the world there exist investors who can go on doubling money every month, then you’ll get a surprising number of yeses. This sounds like believing in anything you hear.

No one who invests in the stock markets ever loses any money. Or at least, that’s what I will have to believe if I take at face value whatever someone says about their personal performance in managing their investments. I’m serious. It’s amazing, actually. The markets fall. Dubious stocks shoot up and people keep buying them and then when the markets fall and stagnate and no one admits to having lost any actual money. To be fair, there are some who admit to holding investments that are way under water from their purchase price, but claim that this is not a loss but a temporary dip.

That’s a point of view, I suppose. Not only does this undying faith in the existence of supernatural rates of return persist, it does a lot of real harm.

The refusal to admit to wrong investing decisions means that we miss the opportunity to learn from them. I know these sounds like a slogan from one of those motivational posters, but failure really is a very good teacher. Provided one makes the effort to learn from it.

And at least in the case of investments, it isn’t all that difficult to learn from bad investments. What one has to do is to honestly think of the reasons why one bought that investment and then resolve not to repeat that reason without any further refinements.

Let me illustrate with a couple of examples.

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Both short term and long term trading can be effective trading strategies, however, long term trading has several significant advantages. These include the effect of compounding, the opportunity to earn from dividends, reduction of the impact of price fluctuations, the ability to make corrections in a more timely manner, less time spent monitoring stocks.

Compounding: Time can be investor’s best friend because it gives compounding time to work its magic. Compounding is the mathematical process where interest on your money in turn earns interest and is added to your principal.

Dividends: Holding a stock to take advantage of payouts from dividends is another way to increase the value of an investment. Some companies offer the ability to reinvest dividends with additional share purchases thereby increasing the overall value of your investment. Additionally, dividends are more a reflection of a company’s overall business strategy and success than volatile price fluctuations based on market emotions.

Reduction Of The Impact Of Price Fluctuations: In the long term investment the persons is less affected by short term volatility. The market tends to address all factors that keep changing in the short term. So a person involved in long term investment or trading will not be affected as much by short term instability due to factors such as liquidity, fancy of a particular sector or stock which may make the price of a stock over or undervalued. In the long term, good stocks which may have been affected due to some other factors (in the short term) will give better than average returns.

Long-term investors, particularly those who invest in a diversified portfolio, can ride out down markets without dramatically affecting his or her ability to reach their goals.

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When it comes to building your nest egg, the most important strategy is to minimize loss. The best way to minimize this risk is through the power of diversification. By diversifying your portfolio, you are ensuring that your nest egg is spread across different baskets. Diversification helps to strengthen and protect your portfolio.

Your chances are increased that if one area falls another area that you have invested in will remain strong, and your assets will be protected..

I define risk as the probability of things going wrong. Once things have gone wrong, they cannot go right. Older investors will remember this feeling they have after their losses, of wanting to turn the clock back. It is the same feeling you get after losing a loved one, when you want to reach out and touch the person after she or he is gone.

The preventive part is all about ‘diversification’, almost the only way to manage risk as defined in financial markets. Both risk measurement and diversification lend themselves to mathematical and statistical analysis, giving classical finance its biases. .

Value investors do the opposite. They add to their positions as a scrip goes down, playing to be the ‘last man standing’, i.e. trying to buy the last falling share as sellers depart the stock. The more of these ‘last’ shares they can pick up, the better their returns, provided of course, they have bought a safe, steady business at a great price, and the business recovers subsequently. .

In this strategy, you should try to trade a correlated pair as part of your diversification strategy. Like buying the market leader and short- selling the market laggard. A caution here is that if you are buying at the bottom of the cycle, then the laggards gain more than the market leaders. In a bull market, buying the market leader and short-selling the laggard may be a good trading strategy. Make sure that you don’t make a mistake in reading the market for example, is this a bull market or a bear?. Across the world, the cost of capital will soon start to drop. That would suggest a very shallow bear market, if we see one at all. Even a normally ‘bearish’ person like me is not willing to take a stand.

Statistically one thing is clear – traditional means of diversification won’t save you. Remember one common mistake: mindlessly diversifying into, say, 100-200 stocks, which then go unmonitored for entry and exit points. Since the investor no longer knows enough about these businesses, he is prone to fall prey to rumors. In effect, the act of ‘diversifying’ will actually increase the probability of losses rather than reduce it.

True diversification includes far more investment choices than just stocks and bonds. It includes other non-correlating asset classes that don’t intrinsically involve either speculation or timing. Aggressive investors like the readers of this article must be having more than 50 per cent of their net worth in equities, especially if they are below 40.

With each investment be sure to invest no more than you can afford to lose, so you can sleep at night. And use dollar cost averaging – taking a fixed proportion of your personal savings each month to add to your investment holdings, so that volatility becomes an advantage over a long time horizon. Only then will diversification begin to make statistical sense.

The initial exchange gave way to a group of merchants who banned together to form the New York Stock Exchange. This initial assembly of men met every day on Wall Street to trade their stocks and bonds – an outdoor ritual that lasted through to the early 1900s, when commerce moved indoors. Today, investment on this scale has come full circle – operating outside the bricks and mortar of traditional trading. Today’s investors operate en masse through the Internet, buying and selling stocks online with the click of a mouse.

Buying and selling stocks online has become the new way of investing. In this chaotic world of long work hours combined with the juggling of frenzied family schedules, the computer has taken an ever-increasing role – giving us a place to work, communicate, and be entertained any time of day from the comfort of our homes. The computer has also taken an ever-increasing role in investing, offering consumers the opportunity to trade online. Several reputable companies have pioneered the online investment arena where they have kept pace with the changing needs of today’s modern investors.

In accessing stocks online, investors have been given access to a bevy of services previously only obtained through visiting brokers in the brick and mortar world of finance. Online investment through reputable brokerage companies requires investors to set up an account through the website. They can then access their financial portfolio at the touch of a mouse. Additionally, these companies will offer up-to-the-minute stock quotes, historical performance and forecasts for each stock, as well as in-depth information about each of the companies.

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The world of stocks is a highly dynamic one. One has to constantly be on his/her toes in order to keep abreast of the latest developments taking place. To a layperson, it can be intimidating, with stock prices constantly changing every second.

Of course, we have seen during the (in) famous market crashes that can happen when things do not go according to what the markets expect. When unexpected events and their sudden impact on stock prices make even the most experienced among us quiver, imagine what the common investor must be thinking!

However, I am of the belief that certain simple investing habits, if inculcated well into one’s behavior can make one’s investing experience more comfortable and rewarding..

In this write-up I shall restrict myself with stock market investing. As such, the term ‘investing’ used in this article will simply imply investing in the stock markets. Let us now take a look at some characteristics effective investors possess.

Begin with the end in mind: Investing, in its broadest sense, is one of the most basic and important processes of preparing oneself for meeting future financial needs like child education and marriage and retirement. And stock market investing is no different. It has to be followed like a process with an aim of achieving your future financial needs. Started early, and done in a systematic manner, investing in good quality companies can help an investor generate good returns over a long-term.

Think ‘risk-risk’: In making an investment decision, apart from returns, there is one more very important factor that should weigh heavy on your minds — risk.

Simply defined, it is the uncertainty of happening/non-happening of a certain event(s) that is likely to affect future returns. A risk is generally attributed to external factors that create disturbance in the existing scheme of things. Some of these external factors are geo-political uncertainties (elections, terrorist attacks and wars), financial crisis and economic downturn.

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Perfection is achieved not when there is nothing more to add, but when there is nothing left to take away.

What, you may ask, is the connection between minimalism and investments? A very close connection, I think. When I look at the market for investment products today, and see the kind of investment portfolios that people are collecting, I think there’s a strong need for a self-conscious and aggressive minimalism in investment planning. What is happening now is the very opposite. The loudest messages about investments and savings that reach people are advertising about the launch of new mutual funds. This collective impact of these messages is to fabricate the idea that your investment needs are best met by portioning out little bits of your savings into a large number of exotic and specialized mutual funds.

Here’s a sampling of just the last few months. There are funds specializing in different sizes of companies-large, medium, small and micro. There’s a fund for companies that are facing ‘unique’ situations, which are apparently different from ‘special’ situations. There’s a fund for investing in companies that will benefit from increased infrastructure spending and one for only companies that will benefit from increased consumer spending. There’s a fund for investing in companies that are growing fast and another one only for companies that will grow fast in the long-term. There are even some funds that specialize in companies of all sizes although that’s clearly a meaning of the word ‘specialize’ that’s not there in any dictionary that I have seen.

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When you buy a company’s stock, you are investing in the future growth of the company. Yet, the stock’s price may float up or down based on some broad market or economic factors that may only indirectly effect the company.

For example, the possibility (not certainty) of increased inflation will send the overall market into a slump, especially if the Federal Reserve Board expresses its concern. That concern is seen as translating into higher interest rates to head off any rise in inflation before it gets started. Increased interest rates are bad news for most businesses.

Likewise, pronouncements that the economy is expected to grow at a robust rate is usually a bad sign for the market because it means they will probably be less inclined to cut interest rates – to avoid overheating the economy and fueling inflation.

The trick for investors is understanding which market-moving factors may also directly affect the company and its stock.

Major demographic changes may have a much more permanent effect on a company than temporary fluctuations in interest rates, for example. Aging baby boomers will create opportunities for some companies and problems for others. Knowing the difference will mean investment mistakes avoided.

How do you know what is a major problem or opportunity for a company you own or are considering buying?The answer is to do your homework Study the company, its products and markets. The company Web site (if it doesn’t have a Web site, there’s a big problem) and annual report.

While you won’t find proprietary marketing data in these public forums, you can get a sense of whether the management has a sense of what is important to the future growth of the company.

And it is the future growth of the company that will generate the earnings to benefit shareholders.

Here’s an old story that some of us have heard when we were children. A group of blind men want to know what an elephant is like and are taken to an elephant to figure its shape out for themselves. Each one touches a different part and thus gets a completely different idea of what the elephant is like. One touches its side and thinks the elephant is like a wall. Another one touches the trunk and thinks it to be like a snake. The one who touches the tail thinks that the elephant to be like a rope and the ears were like a fan and the tusks like spears and the legs like tree trunks and so on and so forth. The moral of the story is obvious. In some versions of this story the blind men become violent over their differences and beat each other up. The story is used to indicate that reality may be viewed differently depending upon one’s perspective. The problem, of course, is not the blind men are all wrong but they are all correct, but only partially so.

When the stock markets have fall sharply, losing about 5 per cent over five trading days. Newspapers and on TV channels, there are any number of blind men offering opinions about the elephant in the stock markets. Here are some of the more popular reasons. Worried about inflation and under pressure, the government will reduce duties on X and/or forbid the exports of Y and/or ban futures trading in Z and/or increase capital gains tax (either short-term or long-term) and/or an increase in the Securities Trading Tax and lots more.

All of it sounds like reasonable fears and any one could come true. In recent months, generally when I talked to big investors they seemed to be hunting for reasons to justify the rise in stocks. Now, they are desperately hunting for reasons to prove that stocks are going to fall. At the end of the day, the fact remains that after years of booming stock prices, everyone is nervous and knows that there will some kind of a correction and would like it be over and done with as quickly as possible.
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Every investor has several components that combine to make them successful. The degree of success depends on how well you can implement the components and how well your strategy works.

The method investors have for selecting shares that they want in their portfolio is arguably one of the most important areas of being a successful investor.

The next vital component is the trading plan. This doesn’t need to be overly complex you just need to know what you will do if the share price goes up, down or sideways. If you can cover these three things then you have a contingency for anything the share price can throw at you. And more importantly you will prevent yourself from reacting to market fluctuations.

The trading plan should also incorporate an overall strategy for the share that you have selected and explain the reasoning behind why you’re doing what you’re doing ie why you decided to place your order level at this particular point.

You will need a risk management strategy and to be successful in the long term you will need to implement the strategy. The number of times I’ve seen people unwilling to sell when the share reaches a risk price is a little bit scary.

The above three things are great to have in place but don’t forget that you must be disciplined in implementing them otherwise you’re setting yourself up for failure.

After identifying these strategic factors you should consider how much you are willing to outlay on each share. It is important to try and spend the same amount on each share ie $5000 across a portfolio of 10 shares in order to maintain a balanced portfolio. In other words don’t put all your eggs in one basket.

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