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(1) Stock Market is Tough Place to Make Any Money Consistently
NASDAQ or SP&500 averaged about -6% per year for 5 years between 1999 and 2003. Many individual investors who made killing in the internet bubble period got wiped out during those 5 years. Many who trusted Wall Street experts by investing their life savings into mutual fund had rude awakening after the huge loss and scandals in many of the famous fund names.
Numerous academic studies have shown that more than 90% of mutual funds failed to beat market over the long run and that more than 90% of individual investors lost money in the stock market. Too many people and too many Wall Street experts or mutual fund managers are buying and selling stocks like madmen, with no sound strategy or any hope of long term success. Ironically, theyre the ones who create opportunities for prudent, long term oriented investors.
To be successful in stock market, you either have to become an expert yourself or to seek help from real successful experts. Stock market is such a brutal place that there is no room for half-expert or expert pretenders. The truth is that only a small percentage of disciplined and experienced people earn disproportionate huge amount of return, many times at the expense of the rest. It is an insult to “Wall Street expert” professional title when so many of such “expert pretenders” failed to beat index or merely stay break-even.
(2) Majority of huge performance claims in Ads by “Experts” are not real
Too many investment newsletters or hot mutual funds touted their huge past performance and went into disaster later on. Who do you believe? I have been in this stock market long enough to know that majority of their claims are not “real”. I will tell you why below.
The first reason is simply due to “cheating”. Lets be honest about many Ads. Many of them do not tell the whole and true story of their performance. For example, they would tout huge percentage of gains for certain winning stocks and hide the losing stocks. If you look deeper into their whole portfolio performance, their portfolio performance was not impressive at all. Many investment newsletters will have multiple portfolios in publication. In their ads, they will only mention the performance of the winning portfolio and hide the losing portfolio. The problem with multiple portfolios is that when you subscribe to their newsletters, you would not easily know which portfolio out of many will have best performance in the long run. Which portfolio do you follow? Most important of all, which portfolio out of many does the newsletter author invests for his/her own money? If the newsletter author or the mutual fund manager does not invest into a portfolio himself or herself, how would you trust their services?
Even if past performance of a newsletter or a mutual fund was pretty good, it may not indicate good performance in the future. Many hot technology mutual funds jumped up 100% or more in the 90s and dived to their death after 90% to 99% of loss. Certain investment methods such as growth stocks investing are known to be risky. Momentum investing or day trading methods are known to be extremely risky methods that can wipe out life savings over night. There is simply no free lunch. While a risky method can produce fabulous gain in relative short term, over the long run, a risky method is more likely to make people poorer rather than richer even if a short term gain was gigantic. Gigantic short term gain is just a dangerous stock market trap to lure the inexperienced people into the market. Dreaming for instant satisfaction of huge short term gain overnight with speculation is just a recipe for disaster ahead.
(3) Value Investing is the Only Proven Safe Method
Value mutual funds are well known to have lower volatility than growth mutual funds. Numerous industry and acedemic studies have shown that value stocks as a group performed far better than growth stocks in bear market. Many technology and internet so called “growth stocks” lost 90% to 99% of value in just a couple of years after 2000 while many value stocks went up during the same time frame.
In fact, the single most important element to obtain high investment performance over the long run is to maintain MARGIN OF SAFETY of a portfolio. That is why the greatest investor Warren Buffet once quote “Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.”.
(4) Value Investing is the Proven Method to Make Big Money in the Stock Market
I know that Im going to catch a lot of flak for saying this, and that many people will misunderstand what Im saying. There are certainly other methods of investing or trading, which made people rich. There are certainly many under- performing value mutual funds, which give people wrong impression that value investing is equivalent of low performance with less risk.
However, I want to emphasize that in fact value investing is investment style that can obtain high performance with less risk. I want to stand by my above statement for the following reasons:
* In the early years of my investment career, I have studied and tried all kinds of well known methods of famous investors or traders, Short term trading, Momentum trading, Technical Analysis, CANSLIM, growth stock long term buy and hold, Random Walk theory, etc. I have been there and I have done there. Evidenced by my past investment performance, value investing is the only method that delivered gigantic investment return consistently for me over past many years. In 2003, I have made more than $150,000 in stock market with value investing method. In 2004, I have made even more money than 2003 so far. With the power of compounding, there is really no upper limit for the investment profit with value investing.
* In 1984, Warren Buffet gave a speech titled The Superinvestors of Graham-and-Doddsville, which categorized performance of many famous value investors who beat market year in and year out. Many of people mentioned in this article are legendary multi-billionaire right now. It is true that only a small percentage of investors can beat market consistently. However, it is not by chance at all that so many of students of Benjamin Graham became super riches in America while other methods have not produced that many rich people. It is also not coincident at all that the second richest person in the world is a value investor named Warren Buffet, a student of Benjamin Graham as well.
(5) Value investing will not distract your regular job
The nicest thing about value investing is that it will not distract your regular job if you choose not to stare at the stock market frequently in your office. In fact, it is quite healthy to forget about stock market in your office and worry about that only at your home after work.
Many newbies in the stock market still believe that if they stare at stock price quote closely, they can obtain better chances of winning. It will not. Staring at the stock quote is least important part of this game. In fact, staring closely at the stock price quote is more likely to create a loser rather than a winner because of greed and fear in the stock market. The more one is unable to resist the mad mood of Mr. Market, the more likely one is unable to invest successfully with value investment method.
I am not saying that successful value investing does not require time. The time you will need in value investing depends on the investment vehicle you utilize. If you invest with a value mutual fund, you will not need much time in stock market and you only need to follow up quarterly with your funds performance. If you are a passive investor of my investment newsletter Blast Investor Real-time Plus and you follow my model portfolio passively, you will only need to pay attention to my infrequent trade alert closely and read my newsletter issues every 2 weeks. If you invest by yourself, you will certainly need hours of time every week to look at hundreds of value stock leads and do your own due diligence by reading 10Q or 10K SEC filling, or by listening to conference calls, or by talking to companys management.
(6) Successful Value Investing is Hard, But You can Do It!
I certainly do not want to make you to believe that value investing is as easy as reading couple of books. Value investing not only requires tons of knowledge and expertise in financial analysis, accounting, US tax law, US bankruptcy law, etc., it also requires real life training of right psychology to fight against greed and fear in the stock market. It is hard to do.
However, successful investing certainly can be done and I have done it over past decade myself. You certainly want to look at my investing articles of this web site for more information.
(7) You need to start early in value investing
Lets be honest about value investing, it is not a get-rich- quick scam and it takes time to really make living with value investing without need of your regular job. You need large starting principle if you want to make living from stock market investment than your salary.
By reading Warren Buffets article above, you can pretty much guess that successful value investors can achieve 20% to 30% per year performance consistently over the long run regardless of whether market is bear or bull although it is possible to obtain significantly higher performance in earlier investment years due to smaller fund size and luck. 20% or 30% more consistent investment return is already very high return over the long run. Since Peter Lynch retired from Fidelity, you can rarely find a mutual fund with that kind of performance over past many years.
The best approach is to treat stock market investment as side business in addition to your regular job. Your regular job help you pay your bills and help you earn the initial principle for value investing. Once your investment net worth surpasses $100,000, sooner or later you will realize that your regular job salary can hardly keep up with compounded rate of investment return. Too many people naively believe that they can get rich quick with speculative trading method in stock market rather than a hard work with a job and value investing at side. It is a lot easier to make your first $50,000 net worth with a job rather than speculation in stock market.
Even if you do not have large sum of money right now as principle to make really big profit out of value investing, you still want to start value investing early so that you can learn in and out of value investing in your earlier years of investing in the stock market. Successful investment is long term process. The earlier you start investing successfully, the better off your pocketbook will be, and the quicker you will reach your financial freedom. Lets do a quick math, if your starting capital for investing is $50,000 and your annual compouned rate of return is 30%, you will need 9 years to surpass $500,000 net worth. However, to turn $500,000 net worth into 1 million, you only need 3 more years, think hard!
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* Article by Henry Lu of BlastInvest LLC, a premium investment newsletter publisher in Connecticut. Visit www.BlastInvest.com for FREE “how-to” value investing assistance, web services and more.
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