The Difference Between Stock Market Investment and Speculation

Christopher Quigley  |


Using the “Rule of 72” and a S&P saving strategy to achieve investment success.

The issue of successful stock market investment affects us all. Even if we are not directly engaged in the industry, all of us will need some form of pension to fund our retirement. Whether we like it or not most of our retirement funds will find their way into the financial markets. For this very reason, the issue of pensions has moved politically centre stage; in particular the investment strategies used to administer pension funds. Due to mismanagement, mainly over the last decade, many retirement portfolios have become under-funded at best, or, at worst, totally bust. This situation is a direct result of the managed funds having been speculated rather than invested.

Many cynics will say that the whole investment environment today has more of the characteristics of a casino than of a professional market of equities and, therefore, they doubt that one can ever achieve a faithful and fair return on capital. (See Addendum 2 below on the true rate of inflation). However, this view is erroneous. This essay sets out to explain how to achieve superior pension investment returns through a simple yet powerful investment rule: “the rule of 72. This rule is based on investment and not speculation yet if you faithfully apply it your returns, over time, will be spectacular. Many believe that such degree of return is only possible through “speculative activity”. They are wrong and I will explain.

Benjamin Graham, the father of security analysis, and mentor of Warren Buffett, long believed in the stock market as a means to achieve financial freedom. The wealth he accumulated and the school of successful investment gurus he educated are testament to his insight and genius. The key to his formula has always been one simple concept: VALUE.

His central message never changed and in a financial community which bores easily, his conservative investment style became "classical" and then "old fashioned". Graham ultimately derided the fads and trends that engulfed Wall Street and he eventually gave up trading and managing funds. However, his "baton" of value was spectacularly taken up by his acolyte, Warren Buffett, who went on to become the most successful investor of all time.

Buffett, like Graham, believes the policy of investing does not require high qualities of insight or forethought, as long as some simple rules are applied. In essence these simple rules are:

1. Safety of Capital

2. Adequacy of Return

An operation that does not seek both of the above is not an investment but a speculation.

Now in today's complex, volatile, media-driven and fast-moving market environment how does one actually apply these simple rules? The essential thing to realise is that when you buy an equity, you are purchasing part of a business. Investment is most intelligent when it is most business like.

For over the two decades, for pension purposes, I have been educating clients on how to achieve excellent pension returns through passive saving into the S & P 500. This strategy ensures safety of capital and good return because ones hard earned money is spread over 500 companies (thus ensuring spread of risk) that pay good dividends (thus gaining good return).

The rule of 72.

The 'Rule of 72' is a simplified way to determine how many years an investment will take to double, given a fixed annual rate of interest. Thus by dividing 72 by the annual rate of return, investors can get a rough estimate of how long it will take for the initial investment to “double” itself.

Our target annual rate of return is 10%, made up of 3% dividends plus 7% average annual earnings growth. This average annual return objective when married to the “miracle” of compounding turns a consistent savings fund into an excellent retirement nest egg. Let me demonstrate.

When you divide 10 into 72 you get 7.2 . This means that it will take 7 years (approx.) for ones fund to double:

Year 1. 1000 X 1.10 = 1100

Year 2. 1100 X 1.10 = 1210

Year 3. 1210 X 1.10 = 1331

Year 4. 1131 X 1.10 = 1464

Year 5. 1464 X 1.10 = 1611

Year 6. 1611 X 1.10 = 1771

Year 7. 1771 X 1.10 = 1949

The average “pension investment” cycle is about 30 years, therefore if you focus on achieving an annual investment target of 10% you can get 4 “doublings” (approx.) of your investment over the 30 year period. (See note 1. below). Thus through the “magic” of compounding a 100,000.00 Euro investment grows into a handsome pension fund of 1.6 million Euro after 4 such “doublings”.

Year 1-7. 100,000.00 X 2 = 200,000.00

Year 8-14. 200,000.00 X 2 = 400,000.00

Year 15-21. 400,000.00 X 2 = 800,000.00

Year 22-28. 800,000.00 X 2 = 1,600,000.00

Conclusion

Despite appearing to be a complex matter, the path to investment success can be quite simple, if you have a proven strategy as pointed out by Benjamin Graham in his classis book “The Intelligent Investor”. The financial achievements of his students: Warren Buffett, Charlie Munger, Ed Anderson, Bill Ryane, Rick Guerin and Stan Perlmeter, are testament to the enduring power of his “intelligent” investment philosophy. By applying our earnings growth and dividend investment policy through our S & P strategy the average investor, using discipline and patience, has within his or her grasp to join this hallowed group and earn superior returns in the stock market. Deciding to take this initiative will ensure for the individual and their family financial security and economic independence in their retirement years.

However, time is of the essence.

By Christopher M. Quigley B.Sc. (Maj. Accounting), M.A., QFA.
Qualified Financial Adviser
© Christopher M. Quigley 2nd August 2018
www.wealthbuilder.ie

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Comments

Emerging Growth

Singlepoint Inc

SinglePoint Inc is a mobile technology company engaged in mobile payments, mobile giving, and mobile bidding. It operates mobile commerce and communications platform to accept mobile credit card payments.