Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
YouGov's MRP Poll Final Tory Seats Forecast Revised Down From 359 to 338, Possibly Lower? - 10th Dec 19
What UK Economy (Average Earnings) Predicts for General Election Results 2019 - 10th Dec 19
Labour vs Tory Manifesto's UK General Election Parliamentary Seats Forecast 2019 - 10th Dec 19
Lumber is about to rally and how to play it with this ETF - 10th Dec 19
Social Mood and Leaders Impact on General Election Forecast 2019 - 9th Dec 19
Long-term Potential for Gold Remains Strong! - 9th Dec 19
Stock and Financial Markets Review - 9th Dec 19
Labour / Tory Manifesto's Impact on UK General Election Seats Forecast 2019 - 9th Dec 19
Tory Seats Forecast 2019 General Election Based on UK House Prices Momentum Analysis - 9th Dec 19
Top Tory Marginal Seats at Risk of Loss to Labour and Lib Dems - Election 2019 - 9th Dec 19
UK House Prices Momentum Tory Seats Forecast General Election 2019 - 8th Dec 19
Why Labour is Set to Lose Sheffield Seats at General Election 2019 - 8th Dec 19
Gold and Silver Opportunity Here Is As Good As It Gets - 8th Dec 19
High Yield Bond and Transports Signal Gold Buy Signal - 8th Dec 19
Gold & Silver Stocks Belie CoT Caution - 8th Dec 19
Will Labour Government Spending Bankrupt Britain? UK Debt and Deficits - 7th Dec 19
Lib Dem Fake Tory Election Leaflets - Sheffield Hallam General Election 2019 - 7th Dec 19
You Should Be Buying Gold Stocks Now - 6th Dec 19
The End of Apple Has Begun - 6th Dec 19
How Much Crude Oil Do You Unknowingly Eat? - 6th Dec 19
Labour vs Tory Manifesto Voter Bribes Impact on UK General Election Forecast - 6th Dec 19
Gold Price Forecast – Has the Recovery Finished? - 6th Dec 19
Precious Metals Ratio Charts - 6th Dec 19
Climate Emergency vs Labour Tree Felling Councils Reality - Sheffield General Election 2019 - 6th Dec 19
What Fake UK Unemployment Statistics Predict for General Election Result 2019 - 6th Dec 19
What UK CPI, RPI and REAL INFLATION Predict for General Election Result 2019 - 5th Dec 19
Supply Crunch Coming as Silver Miners Scale Back - 5th Dec 19
Gold Will Not Surpass Its 1980 Peak - 5th Dec 19
UK House Prices Most Accurate Predictor of UK General Elections - 2019 - 5th Dec 19
7 Year Cycles Can Be Powerful And Gold Just Started One - 5th Dec 19
Lib Dems Winning Election Leaflets War Against Labour - Sheffield Hallam 2019 - 5th Dec 19
Do you like to venture out? Test yourself and see what we propose for you - 5th Dec 19
Great Ways To Make Money Over Time - 5th Dec 19
Calculating Your Personal Cost If Stock, Bond and House Prices Return To Average - 4th Dec 19
Will Labour Government Plant More Tree's than Council's Like Sheffield Fell? - 4th Dec 19
What the UK Economy GDP Growth Rate Predicts for General Election 2019 - 4th Dec 19
Gold, Silver and Stock Market Big Picture: Seat Belts Tightened - 4th Dec 19
Online Presence: What You Need to Know About What Others Know About You - 4th Dec 19
New Company Tip: How To Turn Prospects into Customers with CRM Tech - 4th Dec 19
About To Relive The 2007 US Housing Market Real Estate Crash Again? - 3rd Dec 19
How Far Will Gold Reach Before the Upcoming Reversal? - 3rd Dec 19
Is The Current Stock Market Rally A True Valuation Rally or Euphoria? - 3rd Dec 19
Why Shale Oil Not Viable at $45WTI Anymore, OPEC Can Dictate Price Again - 3rd Dec 19
Lib Dem Election Dodgy Leaflets - Sheffield Hallam Battle General Election 2019 - 3rd Dec 19
Land Rover Discovery Sport Brake Pads Uneven Wear Dash Warning Message at 2mm Mark - 3rd Dec 19
The Rise and Evolution of Bitcoin - 3rd Dec 19
Virtual games and sport, which has one related to the other - 3rd Dec 19

Market Oracle FREE Newsletter

UK House prices predicting general election result

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

© 2005-2019 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

6 Critical Money Making Rules