Compounding

[obiwan]

in 1998, I visited a board called hotcopper. I guess things don't change much. This site looks slightly more sensible.

I am amazed that people still expect 10-20% pa real returns on a consistent basis and 50% or such on a leveraged basis. This is a warren buffet type achievement : extremely unlikely year on year. At 20%pa a mere $1000 grows to 9.1 million in 50 years. At 50% $1000 becomes 638 billion (in todays dollars this is 10% of the M4 in the US) in 50 years. No one that I am aware of has been able to do this. It is obvious that high returns over decades are extraordinarily difficult to achieve. There is only a finite amount of real wealth on our planet, and if everyone grew their investments at these speeds soon all the wealth in the world would be insufficient to sustain the returns. Economies, markets and I suspect trading accounts experience k-waves that self correct the system.

I suppose the hope is that you can build up your trading capital through these big gains initially and then preserve it. Unfortunately by doing this you drastically increase your chances of blowing out. And even if you are lucky enough to accumulate enough trading capital you will almost certainly blow out at some stage. Faster is often slower, and perhaps a portfolio aiming at a real return of 5% (or 1 % above the historical mean) is more realistic, likely to be more structually stable over short and long time periods and have a much higher probability of success.

A decade I read a book called the richest man in babylon, it is still one of the best books I have read. Compounding is something that few people understand.

[wayneL]

in 1998, I visited a board called hotcopper. I guess things don't change much. This site looks slightly more sensible.

I am amazed that people still expect 10-20% pa real returns on a consistent basis and 50% or such on a leveraged basis. This is a warren buffet type achievement : extremely unlikely year on year. At 20%pa a mere $1000 grows to 9.1 million in 50 years. At 50% $1000 becomes 638 billion (in todays dollars this is 10% of the M4 in the US) in 50 years. No one that I am aware of has been able to do this. It is obvious that high returns over decades are extraordinarily difficult to achieve. There is only a finite amount of real wealth on our planet, and if everyone grew their investments at these speeds soon all the wealth in the world would be insufficient to sustain the returns. Economies, markets and I suspect trading accounts experience k-waves that self correct the system.

I suppose the hope is that you can build up your trading capital through these big gains initially and then preserve it. Unfortunately by doing this you drastically increase your chances of blowing out. And even if you are lucky enough to accumulate enough trading capital you will almost certainly blow out at some stage. Faster is often slower, and perhaps a portfolio aiming at a real return of 5% (or 1 % above the historical mean) is more realistic, likely to be more structually stable over short and long time periods and have a much higher probability of success.

A decade I read a book called the richest man in babylon, it is still one of the best books I have read. Compounding is something that few people understand.

It depends on your capital base Obi.

50% return on 100-500k is achievable. But as an investor approaches Buffetesque proportions, it becomes less possible.

Also most traders remove a proportion of their profits for living expenses, lessening the compounding effect of these returns.

Of course many traders do blow up, but not the ones with the best risk management practices (eg the Dennis v Eckhart example)

I personally have a maximum amount of capital that I trade with, and the rest gets "invested" in buy hold. You'll find that many long term traders do likewise.

[clowboy]

It's all cyclic.

I dont know very many people that would simply sit on those kind of returns year in year out.

I certainly wouldnt let my $1000 sit for 50 years watching it grow to 9.1 million (1.8 million (inflation adjusted)) maintaining my current lifestyle.

The number one reason people invest is so that they can spend more money.

[stefan]

The number one reason people invest is so that they can spend more money.Interesting statement. I would say it's the number one reason why people fail. I don't want to sound like an old wise guru, but I've come to the conclusion that the secret of a sustainable future is to live BELOW your average income. For whatever reason most people don't share this view as they keep spending like there's no tomorow. Properties are so heavily loaned against these days, it would scare the **** out of me to live like that. Knowing that my boat, holiday and fancy car can only be sustained if house prices don't drop doesn't really sound like much freedom and joy at all.

I still think we will see some interesting corrections in peoples "wealth" within the next 2 years. There are way too many "millionaires" out there right now.

Happy trading

Stefan

[stefan]

Compounding is something that few people understand.Obi, that's very true. The power of compounded interest is certainly something most people ignore. But I think that's because they don't live for tomorrow. They live life today and don't give a sh*t about tomorrow. Compounding is something that goes hand in hand with time and in today's world it would appear that time is a rare commodity. Everything is about NOW. Who cares what happens in 10 years time?

So far this mentality didn't cause any trouble. It is however clear that at some stage it will created quite a lot of unhappy people. Compounding is not only a powerful force when it comes to creating wealth, but it also works the other way round. And that's something even less people seem to understand.

Happy trading

Stefan

[tech/a]

in 1998, I visited a board called hotcopper. I guess things don't change much. This site looks slightly more sensible.


I am amazed that people still expect 10-20% pa real returns on a consistent basis and 50% or such on a leveraged basis.

I cant see where this is a problem if infact they have achieved that.The only expectation I have is that Ill be profitable and if you invest in a Fund that it will be profitable.Neither of us know how profitable.However I do know that my expectancy is higher than that of the Fund.
I like the fund have Quantitative Risk Management in place.

This is a warren buffet type achievement : extremely unlikely year on year. At 20%pa a mere $1000 grows to 9.1 million in 50 years. At 50% $1000 becomes 638 billion (in todays dollars this is 10% of the M4 in the US) in 50 years. No one that I am aware of has been able to do this. It is obvious that high returns over decades are extraordinarily difficult to achieve.

Well they maybe rare but not impossible.If you limit yourself to a belief system that its not possilble then sure as hell it wont be!You know as well as I do that liquidity problems arise even for the instos for massive buys and sells,Youll not see continuous compounding not because it cant be attained continuously but because there comes a point where it cant be implemented.

There is only a finite amount of real wealth on our planet, and if everyone grew their investments at these speeds soon all the wealth in the world would be insufficient to sustain the returns. Economies, markets and I suspect trading accounts experience k-waves that self correct the system.

I suppose the hope is that you can build up your trading capital through these big gains initially and then preserve it. Unfortunately by doing this you drastically increase your chances of blowing out.

Man your convinced that those who do achieve bigger returns are increasing their Risk to do so.Thats just not the case.We actually stay in the deal longer and reap the benifit of time.If its against us we dont sit and watch the losses accumulate!

And even if you are lucky enough to accumulate enough trading capital you will almost certainly blow out at some stage.

WHY what makes you think we place ourselves in that position?

Faster is often slower, and perhaps a portfolio aiming at a real return of 5% (or 1 % above the historical mean) is more realistic, likely to be more structually stable over short and long time periods and have a much higher probability of success.

You should do some research and gain some figures and then youll be able to argue with some form of credibility------((likely to be more)).Seriously your arguements are all hypothetical you just dont know.If you were trading Large sums and holding large property portfolios you wouldnt be insisting on the Slow is safest theory.Youd be doing things differently and speaking from experience.You have one experience Slow and steady---Thats fine and I encourage YOU to ply the same course it suits YOU.Owing Millions or even $100s of $1000s would have you freaking

A decade I read a book called the richest man in babylon, it is still one of the best books I have read. Compounding is something that few people understand.

Compounding as a powerful tool.
You can Compound one idea over and over again if successful.
OR compound profits into any investment.
Bottomline is though not many have the KAHUNAS to do it.

SERIOUS QUESTION
EG Your an investor in property---you see some great value apartments on the esplanade going for great value.You can borrow 1 mill and you feel that the asking price of $300K is fantastic---your reseach puts a price of $450K in 3 yrs-----what do you do? (Anyone can answer)

tech/a

[crashy]

lol how about lease options @ $300k on every apartment for $10k a pop?

[tech/a]

Crashy.

Like your thinking.

Fine if you own them,the apartments (Lease options),how about options to purchase buy them (If they were offered and re sell them before settlement).Both risky but some quick returns could be made.

But thats not what I have in mind.

[clowboy]

Stefan,

It was a gerneralised statement I admit and one size never fits all, however my coment still stands. Despite the fact that you are smart with your money and have learned lessons over time you still invest to increase your net disposable income (while many invest to increase thier income and continue to increase their debt levels).

I guess I could rephrase my statement to...

The number one reason people invest is to obtain finacial freedom (which more often than not increases thier disposable income and in turn expenditure)

[clowboy]

Stefan,

Sorry I dont know your reasons for investing, I should have said that your investments DO increase your disposable income (at least we would hope so)

My bad

[Fleeta]

Obiwan, why are you so cynical about stock picking? Do you honestly believe you cannot beat the market in the long run?

I think you can achieve great return year-on-year with some good stock picking. Sure, last year anyone could make money, of the top 200 stocks, more than 150 went north. Lets say this year the market goes backward 20%. There will still be at least 10 of the top 200 heading north, and some of them with very solid returns. If you can switch into these stocks you can beat the market...all you need is some Tech/a wisdom...

[stefan]

clowboy,
Don't get me wrong. I'm not saying that you're wrong. I'm just making a point about the way people spend their money. You're very right in saying that this is what's happening. People are indeed trying to make money so that they can spend more. I just think that this is also the most likely reason why they will end up in a mess.

Happy trading

Stefan

[tech/a]

clowboy,
Don't get me wrong. I'm not saying that you're wrong. I'm just making a point about the way people spend their money. You're very right in saying that this is what's happening. People are indeed trying to make money so that they can spend more. I just think that this is also the most likely reason why they will end up in a mess.

Ahh spending Money is subject to TIMING as well is it not??
THINK ABOUT IT!
Most spend when they can least afford it and create BAD DEBT.

GOOD DEBT -----is there such a thing--------well is there?


Happy trading

Stefan

tech/a

[Fleeta]

Of course there is good debt...good debt is when it is used to invest in an asset that has a rate of return higher than the interest rate on the debt.

If you could borrow at 6% and be guarenteed a return of 10% on your investment, you would borrow as much money as you possibly could!

[clowboy]

Fleeta,

Interesting comments, this is what (I think) Stefan is talking about.

Over the last few years you basically have been garunted to make 10% a year.

What happens when you have $500,000 in loans costing 6% PA and the
returns drop down to 2-3% PA or worse still interest rates go up 3-4%.

I done mortage broking for a very short time and two things I learnt are
1) people walk in and the first thing they ask is how much can I borrow?
2) We are very "now" orientated, Mortage insurance is the biggest rip off I can think of when it comes to buying a house but you sell it by simply saying "yes you can save up 20% and come back later (saving yourself 10-20k in insurance premiums) but meanwhile the house will have gone up 50-60k

Still the important thing is to have an exit strategy. It doesnt matter if the return decreases or the interest rate goes up if you can liqudate the assets and remove the debt......ride the wave for as long as it lasts.

[stockgod]

My friend said to me the other day, that isn't Investing "risky" and i turned to him and said it was risky not investing. My point being is that its very hard to get a head in life just by having a great job and income. I know many doctors, accountants and other profesionals who earn 6 figure wages that have nothing, while others who are on a far more modest income with investment properties and on there way to early retierement. I like the fact that my money is working for me while, im working aswell.

[tech/a]

Fleeta,

Interesting comments, this is what (I think) Stefan is talking about.

Over the last few years you basically have been garunted to make 10% a year.

What happens when you have $500,000 in loans costing 6% PA and the
returns drop down to 2-3% PA or worse still interest rates go up 3-4%.

Rents would need to drop over 20% this doesnt happen.
Lock in interest rates.

I done mortage broking for a very short time and two things I learnt are
1) people walk in and the first thing they ask is how much can I borrow?
2) We are very "now" orientated, Mortage insurance is the biggest rip off I can think of when it comes to buying a house but you sell it by simply saying "yes you can save up 20% and come back later (saving yourself 10-20k in insurance premiums) but meanwhile the house will have gone up 50-60k

Mortgage insurance is cheap and at a one off $1500 allowed myself to buy more properties with no $$s down (other than equity.)
Gearing in 98 was 75% gearing now due to that lovely property boom and 2 sales 38%.

Still the important thing is to have an exit strategy. It doesnt matter if the return decreases or the interest rate goes up if you can liqudate the assets and remove the debt......ride the wave for as long as it lasts.

One of the smartest comments Ive seen posted on this forum
(Exit Strategy and ride the wave as long as it lasts)

tech/a

[tech/a]

Fleeta your 100% correct.

So why dont people do it!

(1) They dont have a way of increasing their investments by over the interest rates plus costs.
(2) Kahunas are lacking.

tech

[Fleeta]

Why don't people do it...because they want to be able to sleep at night...

For me (and i'm pretty highly geared with a margin loan close to max and a home loan), the problem is that we were brought up to believe that debt is bad. Pay off your mortgage as soon as you can type stuff...which came out of the early 90s 15%+ interest rates. Times have changed but people don't move on.

Tech/a, I noticed that you said about limiting yourself to BT margin loan stocks. I 'try' to do the same, but why is it that some stocks have lower rates. For example, I have shares in Wilson Leaders, an LIC and BT only offer 45% gearing, but surely it is a less risky prospect than some of the others out there. I don't get how they set their lending ratios. Can anyone shed some light?

[tech/a]

Why don't people do it...because they want to be able to sleep at night...

For me (and i'm pretty highly geared with a margin loan close to max and a home loan), the problem is that we were brought up to believe that debt is bad. Pay off your mortgage as soon as you can type stuff...which came out of the early 90s 15%+ interest rates. Times have changed but people don't move on.

Things havent changed from an investment perspective.Same game.Some numbers are different as you note.If you only have one property(The one you live in) then the only way to release funds is to borrow against your equity.Now in times of high inflation and High interest rates(Introduced in an attempt to de fuse inflation) Minimum loans mean minimum cost.BUT and there is a HUGE BUT---regardless of the COST of MONEY if your returning more than the cost you shouldnt be in FEAR of that cost----SIMPLY it (The cost of the money) is a cost of doing BUSINESS.


See lets take this case scenario.
You have $300K available on equity from your home----its all you own.
You have a method which returns say 10% on invested funds and its been tested to death---has a max INITIAL DRAWDOWN of 8% on total funds this has been varified by tests on 20000 portfolios.

Your downside.
$300K loan (For YOUR Money) from the bank.7% = $21K a year
You take a Margin loan for some leverage $600K if all used as it should be 8%= $48K a year.
Say costs $5K (Brokerage).
You surpass your max drawdown 9% leveraged 2.5:1 22% of initial funds $66K

So if you trade for a full 12 mths before you pull out cost $140K less Dividends say at 5% on $900K of shares = $45K so $95K less 48.5% tax deduction = $46K so now around $40K loss (Yeh I know its rough!!).

Your Upside.
$900K @ 10% = $90K plus Divs $135K
Less costs $74K = $ 61K or 20%
Now do it for 20%
one I trade retrurns 35%

Thats Kuhunas but THATS BUSINESS Quantitative Risk

Tech/a, I noticed that you said about limiting yourself to BT margin loan stocks. I 'try' to do the same, but why is it that some stocks have lower rates. For example, I have shares in Wilson Leaders, an LIC and BT only offer 45% gearing, but surely it is a less risky prospect than some of the others out there. I don't get how they set their lending ratios. Can anyone shed some light?

I do this because Fundamental analysis bores me to death.
I havent got the time and BT have a bank of them who select those stocks their willing to lend on available to me for FREE!
The lending ratio is only an OPINION they can have their opinion as its their list and their analysis.The lending ratio wont have any bearing on your trading if trading a portfolio of greater than 5 stocks as youll never reach the maximum lending criteria relative to the lending ratio.

Nothing is set in concrete that their analysis is any better than yours often as youll note its not!
Just use it to your advantage.




tech/a

[Fleeta]

You've sold me - I would do exactly that - just need a system that guarentees 35% return like you have. In the meantime I will just cross my fingers that my share portfolio returns are greater than my ML interest...

You should sell your system and make millions! Hang on a minute, if everyone had your system, doesn't that mean that it will no longer work?

Hmmm, without poor people, there are no rich people...

[crashy]

I think I speak for everyone here when I say:

WHATS THE FRIGGIN DEAL WITH ALL THE BOLD AND COLORED TYPE IN EVERY ONE OF YOUR POSTS?!

HOW ABOUT YOU POST LIKE THE OTHER MERE MORTALS HERE INSTEAD OF ACTING LIKE 'KING ON THRONE'?

I directed some of my chatroom pals over to this site. Some had already been and said they were not interested because there was a pretentious egotistic loudmouth there (their words, not mine.....dont shoot the messenger)

hmmmm I thought......wonder who they could be talking about? lol

[Fleeta]

I wouldn't say that Tech/a is over the top, just emphasising points.

Sure, the guy has tickets on himself, but how many successful people don't.

As long as its informative, i'll keep tuning in.

[crashy]

hilarious

please define "over the top" for us as you understand it, it must be quite a show! :confused: :rolleyes:

[RodC]

Crashy,

You don't speak for me.

I don't have a problem with tech's postings. The colours are just his way of making a point. It obviously works - it got your attention.

Rod.

[tech/a]

Crashy

Im emotionally smashed!!,devastated,crushed

Any value in the postings(mine) or are they self centered and egotistical?

Exactly where is it Ive been pumping my own tyres

I dont talk of any method or push any trading type.
Ive not said my trading method is one that all should use or pushed or even explained it.(Longterm techtrader).
Few actually have the ability to speak from experience and even fewer give back.Most and,its true of here,and many other sites speak from Theory and Hypothesis

My trading records are there for all to see.
If youd like me to fax the titles of property holdings to you or anyone else then glad too just send me your fax no.

Show me where Ive been egotistical other than pointing out the TRUTH which few can handle here as they wouldnt know it if it punched them in the face!----aint that the truth.

Ive not seen any profound words of Economic wisdom from our resident financial advisor--------.Sorry I need to pay for that!
Im looking forward to you professional critique on the Flaws in the 3% profit thread.

Im interested in how else this could have been presented.
Seems that a genuine interest in helping others become successful is shunned.
Why dont you lend a hand rather than sitting in Professional judgement!

Over 1000 hits on a few posts has me thinking that perhaps there is some value seen by others.

Im not here to win friends only to make you think.

Oh and with the highlights why not suggest to Joe that they be removed then we will all be in the same boat.You could learn to use them yourself!

Bluddy Volvo Drivers!

[positivecashflow]

Bluddy Volvo Drivers!
ROFL :behead:

[crashy]

"Im emotionally smashed!!,devastated,crushed"

although intended as sarcasm (symptom of an egotist)
you clearly are hurt, otherwise you would have ignored it.

"Any value in the postings(mine) or are they self centered and egotistical? "

Nobody said anything about value of posts. Im just asking that you tone them down a bit. Your posts ARE informative, but the conceit is unbearable.


Exactly where is it Ive been pumping my own tyres

hmmm lets see, in the last post alone:

"My trading records are there for all to see.
If youd like me to fax the titles of property holdings to you or anyone else then glad too just send me your fax no."

"Show me where Ive been egotistical...."

how about those two sentences for a start!

"I dont talk of any method or push any trading type.
Ive not said my trading method is one that all should use or pushed or even explained it.(Longterm techtrader)."

is that a joke?

"Ive not seen any profound words of Economic wisdom from our resident financial advisor--------.Sorry I need to pay for that!"

oh well I guess I have been wasting my time. I have posted nothing of value?

"Im looking forward to you professional critique on the Flaws in the 3% profit thread."

professional? where? that statement smacks of conceit. translation: "it was so great you cant even fault it"

"Im interested in how else this could have been presented."

how about with a little less "I know everything and you know nothing" and a bit more "I understand and respect your ideas, this is what I do and have had success with it"

"Seems that a genuine interest in helping others become successful is shunned."

and what would chest beating look like I wonder?

"Why dont you lend a hand rather than sitting in Professional judgement!"

theres that word again. Again, I ask, have I posted nothing of value?

"Over 1000 hits on a few posts has me thinking that perhaps there is some value seen by others."

no ego you say? again, nobody said you didnt post anything of value......unlike yourself

"Oh and with the highlights why not suggest to Joe that they be removed then we will all be in the same boat.You could learn to use them yourself!"

strangly, I dont feel the need to stand up on a podium and shout "here ye, here ye, the great Crashy speaks!...look at me, I use colored bold type because Im sooooo much more important and smarter than the rest of you."

dont you realise that is how you are perceived?

our attitudes and thoughts are subconciously radiated through our speech and writings. Some people see it easily, some dont see it at all, and some dont care as long as they keep benefiting.

Traders are often egotistic, its nothing new.....I know I was when I had a hot streak years ago.....and I know how it rubs people the wrong way, which is why Im telling you to tone it down and find some humility.........

[tech/a]

Crashy.

I dont give 2 sheets how Im percieved.

If you see the way I present things as egotistical then so be it.
It wouldnt matter how it was presented you and a few others would see any presentation from someone "Without Credibility" as egotistical.
The only credentials I have is successful application---which Im happy to verify----ofcourse you see this as chest beating-----Peirce off!!!!

Constructively critisise the content by all means but leave your personal opinions in your Volvo.

Who the hell do YOU think YOU are judging ANYONE by the way they present and highlight their postings!!!

[stefan]

One should do some back testing on one's method every now and then to see if it really creates positive expectancy.

Happy trading

Stefan

[dutchie]

If you go to a party (life generally) and there is a loud egostistical person dominating a group just move on to the next group ( it is a waste of time criticising others for the flaws that you percieve they may have) .

If you like what they are saying - stay and listen. :)