Turning $1,000 Into $276 Trillion

Again with the trillions ...
A while back, I wrote a little article aimed at exposing a fairly common market myth: the idea that any individual can trade his or her way to supersized returns, day in and day out. It didn't quite do the trick. The email came.

"All I need is the chart," these hopeful traders tell me. They say, "Give me jumpy, high-volume, popular stocks like Force Protection (Nasdaq: FRPT  ) (which easily moves 2% or 3% in a day), and I can skim a few percent per trade, 50% or 100% a month."

"That will make me rich!"

Or so the story goes.

It sure would make you rich. A trillionaire, actually. And in short time. Starting with $1,000 and getting those 100% returns every month, you'd have a tidy $34 trillion before the end of three years. If you could actually compound at 5% per trade, 15 times a month, my Excel spreadsheet tells me you'd have $276 trillion at the end of 36 months. This alone should have been sufficient evidence to prove that the thesis is bunk.

But some folks (well-meaning, to be sure) misunderstood and wrote asking me for further details on this amazing moneymaking plan.

So much for subtlety.

Let's set the record straight right here: This is not possible.

Bad news? Not really.

The good news is: It is possible to turn thousands into millions, but not via the trading gimmicks. The keys to making millions in the market are persistence, patience, and time.

Uh-oh. I think we just lost the get-rich-quick crowd.

But congratulations to those of you who remain. Avoiding the bogus promises of the "no work, free money" industry is step one to investing successfully. The next is embracing the obvious. The data shows that the way to beat the market isn't with stomach-curdling hot tamales but with boring value stocks.

About that good news
My colleague Bill Barker once penned an article called "70 Times Better Than the Next Microsoft." In it, he explained why value wins in the long run. Here's a one-sentence summary:

It's because the growth-chasers out there always overpay.

A few well-known examples will show how this can crush you, even when you avoid high-priced junk that goes to zero. Overpaying gets you into trouble even when you buy good companies like Microsoft or Dell or Cisco. Look what happened to people who bought them when they peaked in popularity. Pay special attention to that last column, which is the return you got as a shareholder.

P/E 1999

P/E 2000

P/E 2003

P/E Current

Return, 1999-Today

Cisco

120.0

134.0

42.1

27.7

(12%)

Dell

62.8

42.4

39.9

23.0

(27%)

Microsoft

63.9

33.6

26.9

22.7

(13%)

Data from Capital IQ.

Folks who bought when everyone thought these companies could do no wrong are nursing some serious wounds. The best off lost a good chunk of their stake since 1999. But even folks who bought after the bubble had burst and dried up (2003) have seen the price-to-earnings ratios contract.

Turn it around
Here's where you profit from market mania: by making a habit of buying solid businesses that the market presumes to be closer to dead and buried. Look at the same figures for a few other, well-known companies over that same period, ones that the market had largely written off.

October 2007 Returns

P/E 1999

P/E 2000

P/E 2003

P/E Current

Return, 1999-Today

Apple (NASDAQ:AAPL)

22.7

9.5

123.4

47.1

824%

Valero Energy (NYSE:VLO)

N/A

11.9

8.4

7.3

1567%

Fortune Brands (NYSE:FO)

N/A

15.3

17.7

15.9

179%

Cooper Industries (NYSE:CBE)

12.2

10.1

21.5

15.2

204%

Dean Foods (NYSE:DF)

12.1

13.7

15.9

15.2

226%

Data from Capital IQ.

Which stocks were you buying in 2000? Which would you rather have been buying? When everyone was busy buying the most popular names in tech, few had time for dusty old pre-iPod Apple, much less food or energy companies. Apple and Valero came on like gangbusters, while the rest of these simply continued to prosper, and they treated shareholders to very good returns once the Street came back to its senses.

The lesson is simple: Investors invariably do better in the long run by refusing to overpay, and you can do that when you buy what everyone else ignores. Bill cites some compelling numbers he found suggesting that, from 1927 until 2004, "value" stocks of the large- and smaller-cap variety returned 12.4% to 15.4% annually. "Growth" of all stripes couldn't even turn 10%.

A dose of reality
But let's get back to math. Bill's a groovy guy, but here's where I think his argument got a bit ripe: He compounded those hypothetical returns over a 78-year time frame. That assumes you started investing the moment you slid out of the womb and would be content to slide into the grave without ever touching any of that hard-earned dough. Sound reasonable?

Reality doesn't bite
No? I didn't think so. But we don't have to go to extremes to prove our point. Let's assume you start investing at age 21 and you want to pull up stakes 40 years later. Let's further assume that you do this saving in a tax-advantaged Roth IRA, starting with $4,000 and investing only to the current $4,000 limit per year. Finally, I'm going to assume you can get a blended historical value returns, splitting the difference between the two figures cited above, compounded annually. Let's be honest -- this is a pretty aggressive assumption, but I believe it is possible.

Starting

Annual Contributions

Return Rate

Total

$4,000

$4,000

13.9%

$5,948,700

As you'll see, reality might not be 70 times better than the next Microsoft, but it could still be pretty sweet.

What does this mean?
The bottom line here is simple: There is no way to get rich quick. But -- with apologies to the grammar police -- there is a way to get rich slow.

Yes, you can retire with millions, but you absolutely must be persistent with your savings, and you must buy what the market doesn't want. That's exactly the kind of no-nonsense approach we follow at Motley Fool Inside Value, where we look for those 1999 Valeros, while the market is looking elsewhere. A guest pass will let you see what we're looking at today and why.

This article was first published Feb. 24, 2006. It has been updated.

Seth Jayson is no longer working on that 5% per trade. At the time of publication, he was long Microsoft, but had no position in any other company mentioned. View his stock holdings and Fool profile here. Microsoft and Dell are Inside Value recommendations. Dell is a also a Motley Fool Stock Advisor pick. Fool rules are here.


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