I recently saw an ad in Barron's listing seven rules for success in the stock market. I'm going to show you how the system incorporates these rules for success.
1. Know What to Buy - When
The system incorporates the right type of stocks for us small investors (see Chapter 8 on how to pick stocks). Also the system has flexibility on when to buy. I personally like the idea of buying a stock initially when the stock is at or near its 52-week low because it should greatly increase profits. Also closed-end mutual funds work well in the system.
2. Know What Not to Buy
The system shows you what not to buy. Normally you don't want to buy stocks that don't fluctuate, (show a wide range between the year's high and low price), stocks with large dividends, and open-end mutual funds.
3. Know When to Sell (and Buy)
The system shows you exactly when to buy and sell and how much to buy and sell. The system also shows you when you should do nothing.
4. Know How to Measure Risk
The system works well at all risk levels. You can choose the type of stocks in your system to suit any risk level you feel comfortable with.
5. Know How to Diversify I'll show you how to select a rounded 10 stock portfolio that will make allowances for individual stock fluctuations and will give you profits year after year.
6. Know Which Industry Sectors to Select
I will show you a couple of industry sectors I like and will work well with the system. Three I like are gambling, high tech, bio-tech. Also for conservative investors, blue chip stocks have a lot to offer. You basically want industries that are viable for the long term. Industry sectors are not an overriding factor in the system but does play a part.
7. Reap the Rewards of Compounded Appreciation
This is the best part of the system. You'll get good returns in both dollars and percent in the early years. But after a few years, you'll get unbelievable benefits from compounded interest. If you want to see the benefits of compounded appreciation, take the 30% average return and extend it out 12 years and see how much money you have. Here is $10,000 compounded at 30% for 12 years:
| YEAR | STARTING | 30% | TOTAL WORTH |
|---|---|---|---|
| AMOUNT | COMPOUNDED | END OF YEAR | |
| 1ST YEAR | $10,000 | X 1.3 = | $13,000 |
| 2ND YEAR | $13,000 | X 1.3 = | $16,900 |
| 3RD YEAR | $16,900 | X 1.3 = | $21,970 |
| 4TH YEAR | $21,970 | X 1.3 = | $28,561 |
| 5TH YEAR | $28,561 | X 1.3 = | $37,129 |
| 6TH YEAR | $37,129 | X 1.3 = | $48,268 |
| 7TH YEAR | $48,268 | X 1.3 = | $62,741 |
| 8TH YEAR | $62,741 | X 1.3 = | $81,731 |
| 9TH YEAR | $81,731 | X 1.3 = | $106,045 |
| 10TH YEAR | $106,045 | X 1.3 = | $137,858 |
| 11TH YEAR | $137,858 | X 1.3 = | $179,216 |
| 12TH YEAR | 179,216 | X 1.3 = | $232,981 |
And it will keep growing. This is a realistic estimate of the gains you can make under the system if you faithfully follow the system and work at picking the best stocks and close-end funds for the system. You have to hang in there in the early years and keep reinvesting profits back into the system (always pay yourself first and don't touch that money).
Think of compounding this way: in the above example you started with $10,000 and at the end of 12 years it grew to $232,981 or: $232,981 $10,000 = 23.3
This means that every dollar you invested 12 years ago is now worth $23.30. So spend that dollar now and you throw away $23.30 of your future 12 years later. Now you see the value of compounding. Use it for your future too.