Yes, it is possible to achieve greater than 25% returns in the equity market. However, you’d better be prepared to come with a solid plan and work for it!
Wow! Mutual funds have net returns in the 7% range and yet I’m saying that better than 25% returns are achievable by the personal investor. What an outrageous claim! Well, its true and I’m going to show you how.
The personal equity investor has many obstacles to overcome before achieving outstanding returns. Here are a few:
I’m going to quickly cover off the first four and then get into the meat of the discussion which is Strategy.
Greed is one of two specific enemies of the personal investor. Greed keeps us from selling and taking profits when we should. We then ride the price roller coaster back down as our profits go up in smoke. Greed can be conquered by using iron clad trading rules, the kind that we’ll discuss when we talk Strategy.
Next up is Fear, the cousin of greed. Why a cousin? Because it’s the reverse emotion on the downside. Paralised with fear as stock prices tumble and without a solid plan we are frozen and ride the price curve to the bottom as losses mount. Again, iron clad trading rules are the answer. A discussion for later.
Planning is key in successful equity investing. Forget the hot tips and the one-off impulse buys. These are usually poorly researched and dangerous. You must have a definitive plan for all-of your equity investing, one that you follow religiously.
Developing a strategy that will yield long-term returns of greater than 25% is perhaps the biggest obstacle of all. Let’s break it down into manageable pieces.
Funds – Too much money
First, we need to convince ourselves that this 25% goal is achievable. In a world where mutual funds earn around 7% net of fees, that’s a real leap of faith. Or is it? Let’s look at the industry – and focus on its problems. The first of these will surprise you. THEY HAVE TOO MUCH MONEY!!!
In the US alone there are over 9,000 funds with over $19 trillion to invest. The problem is that most of those funds are chasing the same growth stocks in the same hot industries. With so much money chasing a somewhat limited number of stocks, it becomes difficult for them to maneuver. Getting into and particularly out of stocks without cratering prices becomes a real problem.
And they all tend to be in the same stocks. The current hot stocks attract all the attention as fund managers compete with each other for rankings that can be used in marketing.
Funds – lack flexibility
Here is where the personal investor has a clear advantage. They can buy and sell quickly without fear of influencing prices. I’ve said it before – the funds are the elephants while the personal investors can be the nimble cheetahs and gain a real advantage.
That’s it for Part 1. Be sure to tune in for Part 2 where we’ll build a plan that capitalizes on the advantages that the personal investors over the giant funds that rule the market.
Island Equity Systems designs and markets equity trading systems for the personal investor