Monday, September 29, 2014
Can you make huge, consistent returns by making just one investment decision every 10 years?
The answer is "yes"... as long as you focus on big trends.
Let me explain...
Bill Bonner, founder of Agora (the parent company of my publisher), recently visited our office. I've been working with him on his new project, The Bill Bonner Letter.
Bill is a brilliant "big picture" thinker... and it has made him a wealthy man.
Talking with Bill and reading his work is an outstanding education on how the world really works. So today, I want to share one of the most useful ideas we discussed... I'll call it his "one decision" strategy.
As Bill explained, making just one great investment decision every 10 years or so can lead to giant returns. You simply need to make that one great decision... and then give it time to work.
In Bill's book on building wealth, Family Fortunes, he walks readers through an idealized example of how the "one decision" strategy can play out...
You start 40-some years ago, when Richard Nixon took the dollar off the gold standard. "It didn't take much imagination to see what would happen next," he writes... Higher inflation. Higher gold prices.
Gold rose from $35 an ounce at the beginning of the decade all the way to more than $800 by 1980. But you didn't need to call the bottom or the top, Bill points out. "You had years of opportunity to buy gold at a low price." Assuming you got in at $50 and out at $500, you made 10 times your money.
In the early 1980s, the head of the Federal Reserve was cracking down on inflation. Again, you didn't need to know much to see what was coming next. Lower interest rates are bad for gold, good for businesses... and good for stocks.
From the early 1980s to the late 1990s, the Dow Jones Industrial Average rose from about 1,000 to over 11,000 – a tenfold return. Assuming that you got in late, at 1,500, and out early, at 7,500, you made five times your money.
By the turn of the millennium, stocks were way overhyped. And at inflation-adjusted prices, gold was down 80% or 90%. "What should you have done?" Bill asks. "You should have sold stocks and bought gold again."
From the early 2000s to 2011, gold went from about $250 an ounce to about $1,900. If you got in at $300 and out at $1,500, you made five times your money.
Altogether, you could have turned $10,000 into $2.5 million – with three decisions in four decades.
That return amounts to nearly 15% a year, about double the average buy-and-hold return for the stock market. You could have done that without precision timing... just by getting the "one decisions" right.
And it didn't require you to read the future, Bill notes. "All [the decisions] in this example could have been made over many months or many years. You don't really have to do much guesswork, in other words. You can wait and let the markets tell you what is really going on."
So what's the latest "one decision"?
Let's say you got out of gold at $1,500 in early 2011. By that time, stocks had suffered the 2008-09 collapse and were on the rebound. You didn't have to guess where the next uptrend would be. It was already in place.
And if you bought the S&P 500 in late 2011 around, say, 1,200, you've made 75%. No, you didn't buy at "once in a lifetime" values in 2009. But as the chart above shows, you don't have to catch the bottoms to make lots of money on the big trends.
So if you made the "one decision" to be long stocks over the last few years, you're in great shape. That's exactly what we've done in my Daily Wealth Trader service... Since our launch in early 2012, we've been consistent "big picture" bulls on the market. And we still are...
Remember, big trends tend to last longer and go farther than anyone can imagine. In the early 1970s, no one imagined gold would go to $800. In the 1980s, no one imagined the Dow would cross 10,000 before the bull market was done.
I can't say how long our decision to be in stocks will remain a good one. I don't have a crystal ball. But the hallmark of this strategy is there's no rush to make a new decision... We can wait and let the markets tell us what the next big decision will be.
Amber Lee Mason
There are three main ways to gauge what's happening with stocks today. And the right one to use is one of the biggest disputes in the market. But Amber says she doesn't take sides... "Today, I'm going to show you how the market looks through all three 'lenses'... and how that's dictating our trading strategy." Get all the details here.
Amber says, in the market, we're often our own "worst enemies." The average investor's annual returns are "way on the losing end, past even inflation." So what can you do to be better than average? Find out here.
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