Miracle of Stable Investment Return

A number of my readers and students are asking for stock investment tip.  Why they do so?  Simply because they are expecting to earn big within short period of time without doing much work.  Accept the fact that there is no free lunch in this work.  What you get is totally depending on what you have input.  You give peanuts, you'll get monkeys.

When we were kids, our parents might keep telling us that we should study hard IN ORDER TO HAVE BETTER LIFE IN THE FUTURE.  In other words, we have been taught on input and output.  The same is applicable to stock investment and there is no shortcut.

You might see your friend earned big because of TIPS received from an "RELIABLE SOURCE".  Your faith on steady long term earning was shaken, as a result.  What can this tell you?  You are still not sure what you are doing and is losing faith on your belief when seeing others earn big within short period of time.  Just look around you.  How many of your friends around who earned big within short period of time and able sustain what he/she earned?  I bet almost none.  Here, I would like to share an example on why this could happen.

First, let us make some assumptions.  There are two investors here.  Investor A is a speculator.  He listen all sorts of rumors in order to earn big in short period of time.  Investor B is an conservative investor.  His aim is not earning big within short period of time but expect stable investment return.

Both of them invested RM100,000 at the beginning of Year 1.  By the end of each year, following happened:

Year 1

Investor A: $100,000 + $100,000 x 20% = $120,000 (Due to buying on rumors, Investor A earns 20% on his $100,000 investment.  Annualized return = 20%)

Investor B: $100,000 + $100,000 x 6% = $106,000 (Due to conservative in nature, conservative investment earns only table 6% return.  Annualized return = 6%). 

Result: Investor A wins by earning $14,000 more.

Year 2

Investor A: $120,000 + $120,000 x 20% = $144,000 (Due to buying on rumors, Investor A earns another 20% on his $100,000 investment.  Annualized return = 20%)

Investor B: $106,000 + $106,000 x 6% = $112,360 (Investor B again earns only 6% on dividend and paper gain.  Annualized return = 6%). 

Result: Investor A wins again by earning $31,640 more.

Year 3

Investor A: $144,000 + $144,000 x -20% = $115,200 (Due to market downturn, Investor A loss 20%.  Annualized return = 4.8%)

Investor B: $112,360 + $112,360 x 6% = $112,360 (Investor B again earns only 6% on dividend and paper gain.  Annualized return = 6%). 

Result: Investor B wins by earning $2,840 more.

Can you see the picture now?  Even though Investor A earned big in the first 2 years (20% each year), his return is slashed with just a 20% market adjustment in Year 3.  You might say Investor A could clear his position when he get the rumors that the market is coming down.  Yes, you can say that.  But there are still differences.  Investor A has to spend his time to get timely "rumors" which might not necessary to become true in order to act timely while Investor B doesn't have to as he knows that his investment will give him stable return without any hassle.  He could spend time on what he fond of instead of panicky with high tension on seeking for buy and sell in front of computer monitor or in broker's office.  Which kind of life would you prefer?


P/S: Annualized return = [(Vn - V0) ^ (1/n)] - 1
where
Vn is Value of Year n

V0 is Initial Investment Amount
n is Number of Years of Investment