Albert Einstein once said, “COMPOUND INTEREST IS THE EIGHTH WONDER OF THE WORLD. HE WHO UNDERSTANDS IT, EARNS IT… HE WHO DOESN’T… PAYS IT”
In this lesson you will take a deep dive into the power of longer-term investing.
By now you are getting closer and closer to beating the market. Things that will help you massively in doing so are the decennial pattern, presidential election seasonality, the dynamic yield curve, the “Campus Buy Signal”, and all of those set the foundation for your long-term portfolio.
However, what does it really mean to beat the market? Let us define that first so we know where we are headed in this lesson. Well, let us look at the past 20 years to give you a little perspective in terms of real numbers.
We as an online trading academy really like looking at a 20-year window, as this is the timeframe, we generally would be looking at as a long-term investment, retirement funds or wealth generation. The benchmark for us is the S&P500, as this index has got one of the best and longest track records, we could be talking the Dow Jones as well, which would just give us a similar benchmark. Over the past 20 years, your average return on investment per year would have been just a little over 5%. 5.49% to be exact. Now this may not seem like much, but if you initially invested 100,000 dollars and wait for 20 years, you end up with approximately $222,000, thanks to the compound interest effect.
Lesson 1: Campus Long-term Algorithm
Looking at an average of 5%, already we are likely to beat that by just looking at tools we have already introduced, such as the inverted yield curve, the decennial pattern and the “Campus Buy Signal”. What we are doing in this lesson takes a lot of outside back testing and sample sizing, but in general this is the only way how you can back test strategies, by looking at the past and seeing what worked and what did not. After all, the argument of saying “what if you invested 20 years ago” is also kind of a back test and does not really tell you what happens in the future. It just assumes similar kind of market returns in the future.
Here is the interesting back test we created: We as an online trading academy developed a computerized back test to sidestep recessions and to time new bull markets with just the decennial pattern, the dynamic yield curve, and the “Campus Buy Signal”. And if you only follow those rules you would end up with a whopping $355,000 after the same 20 years.
Lesson 2: The Rules
When performing back tests in the market it is important to have computerized and mechanic rules in place to tell the computer when to buy and when to sell. Doing it computerized, there are no what ifs and buts, only simple rules that tell the computer to buy now and sell tomorrow.
The results are astounding. With the classic buy and hold approach there would have been a lot of emotional backdrop you may have gone through when investing in 2000. You basically wait for 12 whopping years to go back to break even. With a maximum drawdown of -40% in 2002 and 2008 again. This can come with all sorts of emotional distress, which can result in decision making problems. So, the key-takeaway here is that we can beat the market with a simple computerized approach by big numbers. With our online trading academy strategy, the computer made a 255% return in 20 years and with the classic buy and hold the computer only made a 122%.
Lesson 3: Stock Selection
So, you may be asking, well what else is there going to be. Simple, stock selection. Yes, we can make our lives quite easy and invest in the equity indices like the S&P500, or the Dow Jones Industrial Average, and there are also advantages to that over and above the stock selection part but what if we could select some of the winners, to further outperform the market. That would come with a little more work, but it could be key to further outperform the market.
Finding the right stock is like finding a needle in a haystack. There are various ways to select stocks today. And very generally, we can say that the more popular a stock selection strategy or a stock itself is the less likely it is to work. And that has been a good operating rule in the past. You may get a stock recommendation from a friend of yours at work, or your family or maybe you just read an article about it.
Now do not get us wrong, lots of these become big winners, and we may want to roll the dice on those every now and again, there is nothing wrong with that. But those new stocks should not make up a serious amount of your total wealth. One of the great myths of Wall Street is that you must catch these highflyers to really succeed in Wall Street. And that is not true. Our main goal is to operate on a consistent longer-term strategy, that produces results year after year, and to make use of the compounding effect consistently. And these do not have to be high-flyer results to really make headway with your retirement funds. The focus should be on consistency. So, the question we must ask is the following.
Looking at the past decades of stock performance, what are the most consistent reasons of stocks going up in value? And answering that is amazingly simple.
One of the most important basic principles to understand long-term investing is that stocks, that create long-lasting trends are the ones that produce consistent earnings, which ideally increase over time. In other words, stocks that have a value, and ultimately history shows that value is rewarded in the long run. So, how do we identify value?
This is exactly what we will teach you right here. We will teach you objective and mechanic rules on how to find value in individual stocks from a fundamental analysis.
Generally, value can be argued in two ways. The first is innovation. People love innovation, they love new things, and investors are always on the lookout for the next new innovative marketplace. And in fact, popularity on what the new thing is has rotated over the years. One year it was drug stocks, then biogenetics, followed by computer chip manufacturer, cryptos, even though cryptos are not stocks, then weed stocks and now once again big tech companies. There is always a certain group of stocks that benefit from this natural rotation of money finding its way to the darlings of the day. The problem is that looking back, it is extremely difficult to know, beforehand, which group of stocks is going to benefit the most in the future. So, this approach is not consistent. Because we only know once we know, and then it is mostly already too late.
The second way on arguing value are finding the companies that are making money. And this one is by far the more consistent and stable approach. If a company makes money and increases their earnings, the price of the stock goes higher. This is not revolutionary, but investors often forget the simplicity of investing. And oftentimes, the simpler and more consistent the approach the better and more consistent the long-term results. This is because big money and smart money prefers consistency, big money hates the unknown and wants to eliminate the fear of the future.
As a long-term investor you want to combine both worlds, ultimately you want to invest with the smart money. And while, we are going to focus on value in terms of companies that make money, we are also going to look at these innovative stocks that, as a group seem to outperform the rest of the market. This is called, comparative strength.
Therefore, what we are going to show you is how to create your own basket of stocks. Your own portfolio if you will, following our set of rules. You will learn how to avoid the losers, which is going to be easy and focusing on the winners, which is a little harder, but even if we just take out the losers, we are highly likely to outperform a general index like the Dow Jones Industrial Average, and therefore, outperform the general market.
Lesson 4: How to find innovative Stocks that are safe
Would not you like to get Microsoft or Apple early in the game. For instance: Apple was only added to the Dow Jones in the year of 2015. In 2015 Apple was only trading at $20, while today it is trading at $120, well considering the stock split, so the prices change, however, the percentage gain is the same.
Microsoft was added to the Dow Jones in 1999. Back then it was trading at $35 per share. It is now at a whopping $200 per share. And the list goes on and on and on. So, our point is, their track record of adding new stocks, that are innovative, valuable, and make money in the long-term is impeccable. Understanding this concept gives us the opportunity to look at the right innovative companies early on. Early enough, to still have huge growth potential, but established enough companies to not risk a total blow out of our capital.
You will learn all the rules on how also you can spot those companies early on.
Lesson 5: Beating the Market
Can we outperform the general market? You will see that the data proves it. Yes, we can. All you need is a consistent set of rules that you can follow with little time. Ones that have a proven track record with 100 years of outside sample size and strategies we have created through complex computerized back tests and algorithms. We as an online trading academy spend days, weeks and months analyzing the stock market and creating computerized hypothetical tests to see what really worked and what did not. And in this lesson, we only teach you the strategies we found to have shown the best results in the past.