How to Make 1,000% Returns in the “Idea Economy’

Silicon Valley way of Investing 

According to Prof. Roger Ibbotson , Yale School of Management (1982), $1 invested in MicroCap vs. $1 investors in S&P 500 from 1926. The same 1 dollar invested in the S&P 500 grew to $150.64 while the same 1 dollar invested in micro-cap grew to $1,635

The real money is in micro caps. While common misconception about micro caps is that those stocks are riskier than large-cap stocks. With the help of financial ratios and filtering process, much of the risk can be reduced while keeping the upside potential.

 

The Big secret to being successful Micro Cap Investor

If we told you to go out and make three thousand dollars in the next 2 days, if your mindset wasn’t in the right place you wouldn’t even give it a short for a few hours and then succumb to thought. I cant’t because I’m too busy or lazy or clueless. I have tried everything and my past experience told me it won’t work.

To make it in a competitive world of investing, our thoughts and emotions catalyze not only our actions, they also supply all the ingredients for a creation:

  • Belief System
  • Focus
  • Clarity
  • Faith
  • Urgency
  • Decisive Action
  • Tenacity

 

Research suggests that returns from 1970-1998 period assuming a 5.23% annualized inflation that small stocks, are beating returns of 5 Yr and 20 Yr bonds, the S&P & Treasury-Bills

The returns for buying bonds is relatively easy to calculate, as a good portion of return is simply the coupon. For instance, the interest rate for 30-year Treasury bond is 6%. If interest rates do not change, you will in fact receive a 6% long-term return.  If rates fall, then you will get a slightly lower return.

 

Estimating the value of stock or stock market is more complicated. Over the decades stock returns should be higher than bonds. As Benjamin Graham puts it, in the short run the stock market is a voting machine, but that in the long run it is a weighing machine.

Source: S&P

 

 

 

Musk hopes that Tesla’s third-generation car, the Model 3 released in 2017 will be a real measure to impact car indsutry. Starting price for a Model 3 will be $35,000. In comparison, BMW sells about 300,000 Minis and 500,000 of its BMW 3 series per year. Tesla’s goal is to march those figures in the next few years.

 

To keep up with Tesla’s demand for lithium ion battery supply, Musk has build the world’s largest lithium oil manufacturing facility named the Gigafactory. By raising $2 billion by selling bonds, Tesla saved itself from the brink of financial disaster in 2014.

 

Back in 2013, when TSLA was a so called ‘Small Cap’ , I knew I needed to own TSLA’s stock when it was trading at $25. Back when Wall Street was not talking about TSLA, in fact Flashback: Mad Money Jim Cramer hated it and said this

 

 

 

So yes, go ahead and buy GM , F. And this is why watching CNBC and Bloomberg Won’t get you Rich ! ‘Cramer: You don’t want to Own the Stock , You don’t even want to RENT THE DARN THING.’

Let’s compare the returns of ‘The Silicon Valley Way of Investing ‘ vs ‘ Cramer’s style of investing ‘

 

TSLA , stock we bought in with 10x returns. Or Ten Times your returns with every $10,000 invested turns into $100,000 using the ‘Silicon Valley Loophole’ method



TSLA Trade update by wallstreetsharks on TradingView.com

Let’s look at Ford, reccomended by Cramer. Same Time Frame, Different Returns?



F by wallstreetsharks on TradingView.com

TSLA Trade update by wallstreetsharks on TradingView.com


There’s huge potential with Tesla’s goal of setting itself up to capitalize on situation like the one Apple found itself when it first introduced the iPhone.

Apple’s competitor Steve Ballmer of Microsoft laughed at the iPhone when it was first released in 2007.

 

Similar with competitors of Tesla, Musk said. “ They think Gigafactory is a stupid idea, and battery supplier should just go build something like that’.

 

Tesla is setting itself up to capitalize on station like the one Apple found itself in when it first introduced the iPhone. Once it became clear Apple had a hit, competitors will soon play the catch up game.

 

If Tesla in the next 5 years can prove the Model 3 to be a massive hit, this will change the automobile industry like Apple did with the iPhone.

 

I believe true wealth comes from owning companies for a long period of time. The upside will be saving tonnes in broker’s commissions and fees adding to my long-term profitability .

 

  ‘As Charlie Munger puts it’ The big money is not in the buying and selling, but the waiting’. 

 

Although most small companies like these have traditional or not-so exciting businesses, we look to buy companies with solid EBIT ratio , about 8 times , which leads to strong profit potential.

 

TSLA , a 10x stock after delivering profitability with the Model S. TSLA briefly surpassed the valuation of GM and Ford in 2017.

 

Age of the Disruption 

The buzz word in Silicon Valley is ‘Disruption’. Startups are. always looking to get into existing industries and ‘disrupt’ them, or improving the once tired and old business models.

For instance,

Amazon disrupted the bookstore business and became the largest and cheapest place to buy a book.

 

Uber is changing the taxi cab industry offering a better and cheaper alternative to cabs.

 

Airbnb is allowing anyone to rent out an extra room in the house by disrupting the hotel industry.

 

Elon Musk and Tesla is disrupting the automobile industry even if that trend only involve a large group of people in the high income bracket.

 

How to be Antifragile

Nassim Nicholas Taleb , author of the Black Swan explained how taking a lot of small risks and being open to positive Blacks Swans can make you Antifragile.

According to Taleb (2014), Antifragility is the combination of being aggressive but conservative , or having a capped downside so you are immune to extreme events.

In other words, by reducing or capping the downside risks and keeping the upside unlimited, the positive ‘black swans’ can benefit investors with massive financial gain.

 

More importantly, the Barbell strategy, keeping 90% of your portfolio in conservative assets like cash, bonds, stocks and taking small risks in others say 10% in derivatives, startups, etc.

 

The Silicon Valley way of trial and error. When applied to investing, with low cost mistakes and a potential payoff (unlimited), you can position yourself to gain from a world of volatility.

 

In 2017, we are worried that various ‘unthinkables’: North Korean Nuclear, Melting of Polar Ice, World War III and so on. Meanwhile, we had witnessed the unthinkables, smartphone revolution, fall of communism, Artificial Intelligence, birth of the Electric Car, Space travel.

 

As we are moving away from the Industrial revolution to the new economy. As disruptive technologies has caused loss of jobs and heartache to the old economy, it also freed up millions of workers to move int exciting and productive jobs in fast-growing industries.

 

The argument is simple, buying stocks leveraging on this ‘new economy’ is not buying lottery tickets. Stock prices will rise if the company do well and good companies that continue to increase earnings will positively impact your bottomline. Want to Learn More ? 

3 Ways to Build Resilience in Life & Trading

The key to success is staying calm 80% of the time and not losing your nerve. Once you have a clearer mind, you can figure the rest out, but once you lose your calm, everything else starts falling apart.

 

 

Over the years, I’ve interacted and trained hundreds of traders but, when I first started trading my own money in 2007, I had no idea what was to come- none of us did.

I also joined dozens of trading workshops , the typical trainer tells students all the things about trading, the graduates throw their caps, take lots of photos, and everyone goes home happy after a two full days workshop. However, I decided to turn this typical educational route on its head.

 

In the world of investing, we will still do the studying and you still have to take actual risks. But I am not writing this to tell you all the things I’ve learned in my trading career. Today I will try to tell you what I learned in my biggest failures.

 

Throughout the financial crisis in 2008 that affected millions of jobs, I discovered a tremendous reservoir of resilience that helped me get me through this terrible time. I found resilience by overcoming the three Ps described by psychologist Martin Seligman- relentlessly , one by one. These include:

 

 

 

Personalization 

After losing most of my savings during the financial crash in 2008, I blamed myself for not noticing the symptoms of the impending economic collapse. Getting past this self-blame was the first step in building resilience.

 

For instance, Studies have shown that getting past personalization can actually make you stronger.

 

Unperforming Atlletes who believed they were capable of better results have shown dramatically improved performance. In other words, not taking failures personally allows us to to recover – and even to thrive.

 

 

 

Pervasiveness

Pervaviveness is the ‘ belief that an event will affect all areas of your life.’

 

I remember sitting at my trading desk full of flashing reds on the scree, staring into the free falling market. All I could think was , Where is everyone putting their money and how could this possibly happen?.

 

But then I got drawn into the discussion and for a second, I forgot about the losses. Why would I ever get upset about anything? Money can be made back. Something didn’t go according to plan might be for a good reason.

 

 

 

Permanence

 

Permanence is the ‘Belief that the problem will last forever.’ For months, no matter what I did, it felt like a crushing grief and defeat would always be there.

 

I spoke to a friend who works on Wall Street and he told me in any kind of high-pressure situation, the key to success is staying calm 80% of the time and not losing your nerve. Once you have a clearer mind, you can figure the rest out, but once you lose your calm, everything else starts falling apart.

 

No matter what happens each day, I go to bed having three things to be grateful for. As gratitude and appreciation is key to resilience.

 

Failure is not durable. Even if I was not profitable when I first started trading, I would have learned so much by deciding to embark on this journey. That was the idea- I’m here to learn, I’m not here to win, I’m here to learn, because then I will win, eventually…

 

If your look through the ashes long enough, you will find the key to success in every failure.

 

 

Why Dividends is the ‘Most Powerful Force’ in the Investment Universe

We all heard that ‘compounding’ is one of the most powerful investment concepts known to investors. However, that is only one small part of the story. The main body of of the story will be finding the right stocks to invest in. Compounding doesn’t work if the companies you invest in companies that have bad business models, substandard technology or not paying any dividends at all for a long period of time.

 

As Einstein puts it ‘ The Most Powerful Force in the Universe’ only works when you reinvest the money you make from an initial investment to grow even more money. Assuming your initial investment of $10,000 makes 10% for the first year. Instead of taking out the $1,000 , you reinvest the $1,000 and in the second year, the returns you make is $1,100 or 10% on your new balance of $11,000.

 

A simple Google search will give you a compound return calculator. All you have to do is key in your own starting capital, years and expected interest.

‘Do you know the only thing that gives me pleasure? It’s seeing my dividends coming in.’ John D Rockefeller

 

But again, the S&P 500 returned and average of only 9.7% annually since inception in 1928. We found out that High-dividend-paying stocks returned even more for investors who compounded their returns in the medium to long term.

 

The below table shows how compounding returns work in your favor at 10% annually into 40 years. Note: this is assuming you are not adding any new capital into your initial investment.

 

Year Year’s Returns Total returns Ending Balance Total % Returns based on initial capital

1

$1,000.00

$1,000.00

$11,000.00

10%

2

$1,100.00

$2,100.00

$12,000.00

20%

5

$1,464.00

$6,105.00

$16,105.00

61.5%

10

$2,358.00

$15,937.00

$25,937.00

159%

20

$6,116.00

$57,275.00

$67,275.00

572.8%

40

$41,145.00

$442,592.00

$452,592.00

4425.9%

 

The above shows in 10 years your total money grows into $25,937 or 159% from your initial investment. After 40 years, this adds up to $452,592 or a 4426% returns on your initial investment of $10,000!

 

The fact is, most Mutual Funds or the S&P 500 index do not generate a return of 10% annually. Although compounding can make almost anyone into a millionaire, it is not easy.

 

Most people picked the wrong stocks or panic out of the position at the wrong time like during the Subprime Mortgage crisis in 2008/09 , dot com crash year 2000.

 

The main reason why most people are not seeing this kind of returns is picking the wrong stocks when it comes to compounding.

 

The main key is to pick companies with great businesses, management team and a track record of increasing dividends over the past few years.

 

The Dividend Aristrocates and How to Beat the S&P500

 

Here’s a list of stocks in the S&P 500 that have a good average returns of 10% returns with dividend track records. Please note we are only using 10% as an average for long-term holding. (15 years and above)

 

Company Ticker Company Ticker
Abbott Labs ABT General Dynamics GD
AT&T T W.W Grainger GWW
Automatic Data Processing ADP Kimberly-Clark KMB
Cardinal Health CAH Lowe’s LOW
Chevron CVX Medtronic MDT
Cincinnati Financial CINF Nucor NUE
Cintas CTAS S&P Global SPGI
Emerson Electric EMR T.Rowe Price TROW
Federal Realty Inv. Trust FRT VF Corp VFC
Franklin Resources BEN Wal-Mart WMT

 

 

The Dividend Rock Stars for the past 61 years 

 

You will notice the companies that have long consistent track record of giving dividends have one thing in common. They are neither exciting nor in the high growth industry like tech. In other words, those companies sound boring, but boring is good. Warren Buffett’s portfolio is full of stocks that pay dividends .

Warren Buffett says ” If the company will be here in 20 years then it is probably a good business’.

 

Company Ticker
American States Water Company AWR
Dover Corp DOV
Northwest Natural Gas NWN
Parker-Hannifin PH
Genuine Parts GPC
Proctor & Gamble PG

 

What is the easiest way to invest in Dividend Aristocrats?

 

ETFs. Here’s the top three ETFs that focuses on buying companies with dividend growth potential.

 

(VIG ) Vanguard Dividend Appreciation ETF VIG offers a diversified portfolio of highly profitable U.S. dividend-paying companies.This fund has the widest range of dividend paying companies, about 188 of them.

 

SDPR S&P Dividend ETF (SDY) holds about 110 stocks that have been consistently increasing dividends for the past 20 years.

 

(NOBL) ProShares S&P500 Dividend Aristocrats ETF holds about 50 plus stocks only that have raised their dividends for the past 25 years in a row. All those stocks are listed in the S&P 500.

 

Read More