There’s a new blog someone who got tired of hearing investment professionals saying a regular person could not consistently produce good results. So s/he’s out to prove them all wrong, but trying to do it, and documenting the progress. The goal: to turn $100K into $1M in 10 years.
There does seem to be a bit of confusion here. The blog intro says: “Got tired of all the investment gurus saying that a regular person like me can not be a good investor. They can not consistently produce good results.” The 26% annualized returns we’re talking about here are not “good;” they’re “stellar” or “mind-boggling.” It’s not that a regular person can not consistently produce these results, I don’t think anyone could produce these sort of results consistently… BUT: they might be able to do it inconsistently, and it’s not unreasonable to think it might happen enough years in a row to make the 10-year goal.
For the record, I think that the goal is achievable, but only with a level of risk that most people would be unwilling to take on. It would take a lot of luck. But it’s an interesting thought experiment, so I’m just going to lay out how I would go about trying to achieve those type of returns if that were all I cared about (i.e. it didn’t matter if I went broke trying, and ending up with $200K was just as bad as ending up with nothing.)
- Only small and micro-cap stocks. Small stocks get much less attention from analysts, and so are more likely to be mispriced. They are also more likely to make big percentage moves.
- Only buy something if I think it has potential to double or more in a year. I’d need that performance in order to make up for the bets that inevitably blew up in my face.
- Little diversification. The more diversified a portfolio, the less likely it is to achieve extreme returns. I’d probably try to keep my portfolio to about 3-4 positions: enough to give me another chance when one of my highly risky bets imploded in my face, but each position has to be big enough that when I got the 100% to 500% return I’d be shooting for, it would actually do some good for my portfolio.
- No bonds. Bonds just don’t double in price (except for the occasional junk bond.)
- Concentrate stock picks in one or two industries. I’d pick energy, because I know it, and I believe the long term outlook is good. Most of the choices the blogger listed are too steady-eddie for the type of returns I’d be looking for: travel related industries are at risk from rising oil prices, and are very capital intensive; retail typically has low margins, which means they are unlikely to double within a single year. Financials also tend to be slow movers. I do like metals and mining, and technology if you’re looking to take on a lot of risk to get excess returns.
- Pre-Earnings companies. Companies which do not yet have earnings usually go up a lot before and as they transition to profits. Clearly many never get there, but that’s where to look of companies that might double within a year. Many renewable energy stocks are suitable for this sort of stock market gambling.
- I’d try not to do a lot of trading. I’d make my picks, and hold on to them until I thought they were screamingly overvalued. I’m talking about buying a pre-profitability company and holding on to it through the first couple years of profitability. You have to wait for the company to stop bleeding money and start raking in the cash, and for other investors to catch on. That takes years, not months.
- I wouldn’t bother much with options. While it is true that you can get spectacular returns buying options, you can only buy options on larger stocks, which I would be avoiding. The companies I’d concentrate on already have option-like returns. In the real world, I’m a great fan of using cash secured puts and covered calls for income and market timing, but it simply would not be an option with the stocks I’d be buying, and that’s really a better strategy for boosting your overall returns by a fraction of a percent per annum and reducing risk. Multiplying your money ten times is not about reducing risk; it’s about taking risks and crossing your fingers.
Please keep in mind that the strategy I outlined about is basically stock market gambling. It breaks most of the rules of prudent investing, most importantly diversification.
If I were to follow this strategy, I might even be able to get that 10x return in less than 10 years, but the most likely result would be turning $100,000 into $10,000. So I guess I’m like all the other investment professionals, and I don’t expect this experiment work, especially in the current climate of over-valuation. But then, most investment professionals aren’t good at managing money, either.