My investing goals are pretty simple. For several years now, the stated rate of inflation has hovered around 2% to 4%. Interest rates on simple investments such as money market funds and certificates of deposits have run about 4% to 5.5%. The SP500 has returned about 12.8% in recent years. I believe if an individual devotes even a small amount of time to their finances they can beat those rates of return.
So, my investing goals are:
1) Maximize the return on my investments 2) Minimize the risk to my capital 3) Create passive streams of income 4) Secure my financial future
To generate a high enough yield to achieve those goals, investing in the stock market is crucial. There are so many tools on the internet now that investing has moved from the stock broker to the individual. Yahoo and MSN have excellent financial pages and it’s hard to beat The Motley Fool for investing ideas and commentary.
There are two ways to utilize the stock market. There is long term investing where you buy and hold stock in a company for many years. Then there is trading where you find inefficiencies in the market and capitalize on that inefficiency in a short term trade. As an individual, you can take advantage of both philosophies in the stock market.
Real wealth is created with the long term buy and hold strategy, but it’s a pretty sweet deal to make 15% to 100% return in just a few months on a market inefficiency.
We all know about the great stocks of the past such as Wal-mart (wmt), Microsoft (msn), and Southwest Airlines (luv). One thing all of those companies have in common is they started off as small companies. Another thing they have in common is they have all grown to be very large companies with relatively limited growth ahead. The people that identified those companies while they were small, invested and held on to the stock through the growth cycle, have made enormous returns on their investments and easily surpassed their investment goals.
So that’s what we must do as investors. Find relatively small profitable companies that are just entering their growth stage and buy and hold. A few stumbling blocks here are defining small company and being profitable. I prefer to invest in a company that has a market cap of at least $100 million and YES, they must be profitable. Be cautious, there are lots of companies that have great stories but lose money year after year. Just look back to the internet bubble of a few years ago. So many companies with such great stories that continually lost money and finally went bust. For your investment to grow, the company must grow AND for the company to grow they MUST be profitable.
Are you familiar with the Compounding Rule of 72? It’s a simple math formula that tells you how long it takes for an investment to double in value. The formula is 72/rate = years to double. For example, if an investment returns 18% the formula would be 72/18 = 4 years. Contrast that to say a CD paying 4% and the formula is 72/4 = 18 years to double. OH MY, that’s a huge difference.
Let’s take a look at 2 investors over an 18 year period and they each start with $10,000. Sam finds a stock that returns 18% over that time. His $10,000 will have grown to about $240,000. Joe plays it safe and puts his money in a CD that pays 4%. Joe’s investment will have only grown to about $20,000.
The example above illustrates how critical it is to invest in the stock market. Sam is going to have a pretty decent retirement while Joe will be looking to move back in with his kids. Sam met his investing goals, while Joe did not meet his investing goals.
Why do we have to find small companies? Several reasons. First, small companies still have a lot of room to grow, whereas big companies become stagnant. Second, this is where market inefficiencies occur. You see, all of the big companies are monitored by numerous analysts on Wall Street and therefore just about everything that can be known, is known by anyone that cares to know. But small companies may be monitored by just one or two analysts or not monitored at all. This means the market as a whole may not be informed as to the greatness and prospects of this small company which will help us reach our investing goals.
Don’t fool yourself into believing you have to find the “Next Great Thing” to reach your investment goals, although don’t close your eyes to evolving trends either. Many industries that have been around for years offer great products and services. The key is to find smaller companies within stable growing industries. Two industries that I am high on now are the Insurance industry and the Natural Gas industry.
The Insurance industry, in my opinion, is a license to steal. They calculate their risks, calculate their cost of operations, factor in profit margin, and waa-laa set their rates to ensure they make money. This makes for great investment opportunities for individual investors. Here are some quick stats on insurance companies I currently like.RGA, 5 year annualized rate of return = 28.3% (plus a dividend)MFC, 5 year annualized rate of return = 61.1% (plus a dividend)UAM, 5 year annualized rate of return = 88.9% (no dividend) Y, 5 year annualized rate of return = 29.0% (no dividend)ZNT, 5 year annualized rate of return = 29.8% (plus a dividend)MKL, 5 year annualized rate of return = 30.3% (no dividend)FFG, 5 year annualized rate of return = 23.3% (plus a dividend)
Those are truly phenomenal returns on investments and I don’t see the Insurance industry declining anytime soon.
I like the Natural Gas industry for a number of reasons. In today’s Green Society, natural gas is much more environmentally friendly than coal. While Solar and other renewable energy sources are being developed, natural gas is readily available and the infrastructure already in place. Here are a couple of stocks I like in this sector:NFG. 5 year annualized rate of return = 29.7% (plus a dividend)SUG, 5 year annualized rate of return = 46.9% (plus a dividend)So, can we meet our investing goals of beating the market and creating streams of income? Yes, without a doubt. It just takes a little time, the right investing strategy, and a little discipline.
Good Luck, play hard, play to win, set investing goals!
Now, "Go Get ‘em Coach!!!"
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