Best of the Week
Most Popular
1.What Happened to the Stock Market Crash Experts Were Predicting - Sol_Palha
2.London Housing Market Property Bubble Vulnerable To Crash - GoldCore
3.The Plan to Control ALL Your Money is Now at Advanced Stage
4.Why Gold Is Set For An Epic Rally This Spring - James Burgess
5.MR ROBOT NHS Cyber Attack Hack - Why Israel, NSA, CIA and GCHQ are Culpable - Nadeem_Walayat
6.Emmanuel Macron and Banking Elite Win French Presidential Election 2017 - Nadeem_Walayat
7.Trend Lines Met, Technical's are Set - US Dollar is Ready to Rally (Elliott Wave Analysis) - Enda_Glynn
8.The Student Debt Servitude Sham - Gordon_T_Long
9.Czar Trump Fires Comey, Terminates Deep State FBI, CIA Director Next? - Nadeem_Walayat
10.UK Local Elections 2017 - Labour Blood Bath, UKIP Death, Tory June 8th Landslide - Nadeem_Walayat
Last 7 days
What an America First Trade Policy Could Mean for the US Dollar - 22nd May 17
Gold and Sillver Markets - Silver Price Sharp Selloff - 22nd May - 22nd May 17
Stock Market Volatile C-Wave - 22nd May 17
Stock Market Trend Forecast and Fear Trading - 22nd May 17
US Dollar Cycle : Deep Dive - 21st May 17
Bitcoin Breaks the $2,000 Mark as Cryptocurrencies Continue to Explode Higher - 21st May 17
Stocks, Commodities and Gold Multi-Market Status - 21st May 17
Stock Market Day Trading Strategies and Brief 20th May 2017 - 21st May 17
DOW Needs to Rally Big or Correction is Next - 20th May 17
EURUSD reaches DO or DIE moment! - 20th May 17
How to Get FREE Walkers Crisps Multi-packs! £5 to £28k Pay Packet Promo - 20th May 17
UK BrExit General Election 2017 - Will Opinion Pollsters Finally Get it Right? - 19th May 17
Gold Mining Junior Stocks GDXJ 2017 Fundamentals - 19th May 17
If China Can Fund Infrastructure With Its Own Credit, So Can We - 19th May 17
Evidence That Stocks are More Overvalued than Ever - 19th May 17
Obamacare May Become Zombiecare In 2018 - 19th May 17
The End of Reflation? Implications for Gold - 19th May 17
Gold and Silver Trading Alert: New Important Technical Development - 19th May 17
Subversion And Constructive Synthesis Of Capitalism And Socialism - 18th May 17
Silver: Train Leaving Station Soon! - 18th May 17
Credit and Volatility Signal That Financial Conditions Are Very Overheated - 18th May 17
Another Stock Market "Minsky Moment" or Will the Markets Calm Down? - 18th May 17
WannaCry Ransomware Virus Is a Globalist False Flag Attack On Bitcoin - 18th May 17
Euro, Stocks, Gold Momentum Extremes All Round! - 18th May 17
US Stock Market Slumps on Establishment / CIA Trump Impeachment Coup Plan - 18th May 17
Tory Landslide, Labour Bloodbath - Will Opinion Pollsters Finally Get a UK Election Right? - 17th May 17
The stock market sectors which are breaking out in 2017 - 17th May 17
A ‘Must-See’ Chart for Gold and Silver Aficionados  - 17th May 17
Will the SPX Stock Market Final Surge Fail to Appear? - 16th May 17
Claim your FREE copy of Jim Rickards’ explosive book - 16th May 17
GOP Establishment Elite Plots Trump Removal - 16th May 17
Walkers Crisps Pay Packet Cheats, Shoplifters and Staff Conning Customers - 16th May 17
Gold and Sillver Markets - Silver Price Sharp Selloff - 15th May 17
Gold Stocks Poised to Soar Sharply Higher! - 15th May 17
This One Undiscovered Pot Stock Could Help Investors Cash In On The “Green Gold Rush” - 15th May 17
WIll Trump Tax Cuts Debt Binge Save Stock Market From Double Top Bear Plunge? - 15th May 17
Trump Rally or Geopolitical Meltdown: Currency Management for Dollar Risk - 15th May 17
A Shallow Stock Market Correction? - 15th May 17

Market Oracle FREE Newsletter

Trading Commodity Markets

The Investment Rule of 72 for Successful Stock Market Investing

InvestorEducation / Learning to Invest Nov 14, 2013 - 12:41 PM GMT

By: Christopher_Quigley

InvestorEducation

The issue of successful stock market investment affects us all. Even if we are not directly engaged in the industry, all of us will need some form of pension to fund our retirement. Whether we like it or not most of our retirement funds will find their way into the financial markets. For this very reason, the issue of pensions has moved politically centre stage, in particular the investment strategies used to direct pension funds. Due to mismanagement, mainly over the last decade, many retirement portfolios have become under-funded at best, or, at worst, totally bust. This situation is a direct result of the managed funds having been speculated rather than invested. Many cynics will say that the whole investment environment today has more of the characteristics of a casino than of a professional market of equities and, therefore, they doubt that one can ever achieve a faithful and fair return on capital. However, this view is erroneous. This essay sets out to explain how to achieve superior stock market investment returns through a simple yet powerful investment rule: “the rule of 72”. This rule is based on investment and not speculation yet if you faithfully apply it your returns, over time, will be worthwhile. Many believe that such degree of return is only possible through “speculative activity”. They are wrong and I will explain.


Benjamin Graham, the father of security analysis, and mentor of Warren Buffett, long believed in the stock market as a means to achieve financial freedom. The wealth he accumulated and the school of successful investment gurus he educated are testament to his insight and genius. The key to his formula has always been one simple concept: VALUE. His central message never changed and in a financial community which bores easily, his conservative investment style became "classical" and then "old fashioned". Graham ultimately derided the fads and trends that engulfed Wall Street and he eventually gave up trading and managing funds. However, his "baton" of value was spectacularly taken up by his acolyte, Warren Buffett, who went on to become the most successful investor of all time.

Buffett, like Graham, believes the policy of investing does not require high qualities of insight or forethought, as long as some simple rules are applied. In essence these simple rules are:

             1.         Safety of Capital

             2.         Adequacy of Return

An operation that does not seek both of the above is not an investment but a speculation.

Now in today's complex, volatile, media-driven and fast-moving market environment how does one actually apply these simple rules? The essential thing to realise is that when you buy an equity, you are purchasing part of a business. Investment is most intelligent when it is most business like. For my part, the best way to achieve this business-like goal is to focus on price, and through systematic analysis of this factor, the grail of value will be discovered.

Investment Filters

At Wealthbuilder, for pension purposes, we educate clients in how to review up to three thousand stocks every quarter. Using a number of filters, equity prospects are identified and compiled into watch lists. Then, through the use of basic technical analysis, appropriate buy-in and sell-out points are pinpointed. The main criteria that are used to filter these stocks are:

             1.         Financial Strength

             2.         Earnings Growth

             3.         Business Model Strength & Sustainability

             4.         Dividend Yield

             5.         Dividend Growth

             6.         Return On Capital

             7.         Price/Earnings Ratio

Of these seven elements, earnings growth and dividend yield are the most important. Why?

The big driver of investment returns over time is not figuring out which sector is going to do best, or which country will surpass the rest, or what investment style will be in vogue, or which consumer group will prevail. No, the biggest driver is:  EARNINGS GROWTH AND INVESTMENT INCOME RECEIVED AND RE-INVESTED. The facts are that with dividend yielding stocks, over a rolling twenty-year period, a significant element of your return will be based on income received. However, in the main, the major part of your gains will come from earning growth because the fundamental axiom of financial dogma is: “where earning go share price will eventually follow”.

Thus it is crucial to your investment success that you find those great companies that give great yet sustainable returns (earning growth plus good dividends) over the long term. The profile of such profit generating institutions can only come from companies in large markets with proven products or services, areas such as: financial services, consumer staples, healthcare, energy and insurance.

Our ideal growth targets?

Earnings growth in the 12% per annum range is our ideal goal. Add to this a dividend yield of 2% and you get our combined investment objective of 14% growth per annum. In summary our investment formula is as follows:

Financially Strong Businesses + Large Growing Sustainable Markets +

Growing Earnings + Good Dividend Yield + Good Dividend Growth =

                                           Superior Value

The rule of 72.

Why do we look for 14% growth? Well to understand this let me now introduce the rule of 72. The "Rule of 72is a simplified way to determine how many years an investment will take to double, given a set annual rate of interest. Thus by dividing 72 by the annual rate of return, investors can get a rough estimate of how long it will take for the initial investment to “double” itself.

For example, the rule of 72 states that $1 invested at 10% would take 7.2 years to turn into $2 (72/10 = 7.2).

Thus our target annual rate of return of 14% requires 5 years for “doublings” to take effect. (See example below using approximations):

Year 1.                         1000 X 1.14    =          1140

Year 2.                         1140 X 1.14    =          1300

Year 3.                         1300 X 1.14    =          1482

Year 4.                         1482 X 1.14    =         1689

Year 5.                         1689 X 1.14    =          1926

The average “pension investment” cycle is 20 years, therefore if you focus on the annual investment target of 14% you can get 4 “doublings” of your initial investment over the 20 year period. Thus through the “magic” of compounding a 100,000.00 dollar investment grows into a handsome pension fund of 1.6 million dollars after 4 such “doublings”.

Year 1-5.                     100,000.00 X 2           =          200,000.00

Year 6-10.                   200,000.00 X 2           =          400,000.00

Year 11-15.                 400,000.00 X 2           =          800,000.00

Year 16-20.                 800,000.00 X 2           =          1,600,000.00

We believe such returns are necessary because over the next 20 years, according, to John Williams of ShadowStats.Com, inflation will not be a benign 1-2% (see CPI rate) but 7-9% (see SGS rate) due to the ongoing Quantitative Easing policies being executed in the USA, Latin America, Canada, Japan, Britain and the EU.

Unless investors have an aggressive strategy to find and stay invested in superior companies giving annual growth rates in our target range their “life-styles” are going to be significantly altered by inflation going forward. Using the ShadowStats above, when we apply the rule of 72 to an annual 7% inflation rate we can reasonably estimate that over the next 20 years there will be two doublings of general price levels (72 divided by 7 is approximately 10. 20 years divided by 10 is 2). This will have a cathartic effect on future society. To be fore-warned is to be fore-armed. It is our opinion that the best way to protect yourself against this monetary crisis is to become a smart investor. Time is of the essence.

Conclusion

Despite appearing to be a complex matter, the path to investment success is quite simple, as pointed out by Graham all those years ago. The financial achievements of his students: Warren Buffett, Charlie Munger, Ed Anderson, Bill Ryane, Rick Guerin and Stan Perlmeter, are testament to the enduring power of his investment philosophy. By applying our earnings growth and dividend investment policy the average investor, using discipline and patience, has within his or her grasp the power formula to earn superior returns in the stock market and thereby win for themselves and their families financial freedom and independence.

By Christopher M. Quigley

B.Sc., M.M.I.I. Grad., M.A.
http://www.wealthbuilder.ie

Mr. Quigley was born in 1958 in Dublin, Ireland. He holds a Bachelor Degree in Accounting and Management from Trinity College Dublin and is a graduate of the Marketing Institute of Ireland. He commenced investing in the stock market in 1989 in Belmont, California where he lived for 6 years. He has developed the Wealthbuilder investment and trading course over the last two decades as a result of research, study and experience. This system marries fundamental analysis with technical analysis and focuses on momentum, value and pension strategies.

Since 2007 Mr. Quigley has written over 80 articles which have been published on popular web   sites based in California, New York, London and Dublin.

Mr. Quigley is now lives in Dublin, Ireland and Tampa Bay, Florida.

© 2013 Copyright Christopher M. Quigley - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Christopher M. Quigley Archive

© 2005-2016 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife