Keep INVESTING Simple and Safe (KISS)
****Investment Philosophy, Strategy and various Valuation Methods****
The same forces that bring risk into investing in the stock market also make possible the large gains many investors enjoy. It’s true that the fluctuations in the market make for losses as well as gains but if you have a proven strategy and stick with it over the long term you will be a winner!****Warren Buffett: Rule No. 1 - Never lose money. Rule No. 2 - Never forget Rule No. 1.
Four hypothetical investors each invested $10,000 in the market from January 1, 1972, to December 31, 2013, but all four investors acted differently during the 1973 to 1974 bear market.
The Nervous Investor sold out and went to cash. The Market Timer sold out but moved back into stocks on January 1, 1983, at the beginning of a historic bull market. The Buy and Hold Investor held steady throughout the period. And lastly, the Opportunistic Investor realized that the bear market had created opportunities and contributed an additional $10,000 to his original investment on January 1, 1975.
This chart shows more than just the benefits of compounding. It also highlights the stupidity of market timing. The chart clearly shows that trying to time the market will severely impact your long-term returns -- there is plenty of other research on the topic of market timing out there that reaches the same conclusion.
It would help explain the wild divergence between total US wealth and the regular incomes of people, now followed by a financial and economic collapse that shows much of that exuberant growth was actually some kind of betting that created only illusory wealth.
The Subtle Power of Rate of Return Earned on Reinvested Capital
In this table, we compare a bond paying 6.5% interest with the stocks of two companies paying dividends of 1.5% while reinvesting a like amount in growing the business. One company earns 20% on the capital it reinvests in the business and the other earns 10%. Reinvestment of earnings gives a business the capital to grow by funding initiatives such as developing new products, building a new plant, and expanding the sales force. A return earned on this investment should lead to an increase in earnings, dividends and eventually stock price. For purposes of the illustration below, we assume that the stock price increases in line with earnings growth and dividends are invested in a money market fund that pays 4%.
Clearly, earning a high rate of return on reinvested capital is the key to long-term compounded growth