Turning $1,000 Into $277 Trillion

A while back, I wrote an article aimed at exposing a fairly common market myth: the idea that an individual can trade his or her way to supersized returns, day in and day out. As usual, I got some email quibbling with my contention.

"All I need is the chart," these hopeful traders tell me. They say, "Give me jumpy, high-volume, popular stocks like Qualcomm (Nasdaq: QCOM  ) (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.

Again with the trillions ...
It sure would make you rich. A trillionaire, actually. And fast. Starting with $1,000 and getting those 100% returns every month, you'd have a tidy $34 trillion within three years. If you could 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, writing to ask 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. 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 1 toward investing successfully. The next step is to embrace 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 Foolish colleague Bill Barker recently penned an article called "70 Times Better Than the Next Microsoft." In it, he explains why value wins in the long run. Here's a one-sentence summary:

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, Dell, or Cisco. Look what happened to people who bought them when they peaked in popularity. Pay special attention to that last column, which represents the return you would have gotten as a shareholder.

P/E 1999

P/E 2000

P/E 2003

P/E Current

Return,
1999 Today

Cisco

122.1

173.7

38.1

19.3

(57%)

Dell (NASDAQ:DELL)

77.4

62.9

36.4

15.4

(49%)

Microsoft (NASDAQ:MSFT)

69.5

46.8

28.9

16.3

(35%)

Dividend-adjusted returns. Data from Capital IQ.

Folks who bought when everyone thought these companies could do no wrong are nursing some serious wounds. The fortunate lost only half their money over eight years. 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: Make a habit of buying solid businesses that the market presumes to be close to dead and buried. Look at the same figures for a few boring, well-known companies over that same period.

P/E 1999

P/E 2000

P/E 2003

P/E Current

Return,
1999-Today

Deere (NYSE:DE)

14.8

31.8

22.0

18.7

246%

Caterpillar (NYSE:CAT)

15.6

13.7

23.6

13.2

208%

Yum! Brands (NYSE:YUM)

14.7

8.4

15.2

21.5

235%

Dividend-adjusted returns. Data from Capital IQ.

Which stocks were you buying in 2000? Which would you rather have been buying? When everyone thought the Internet would change the world, no one wanted companies that did things like building combines, selling loaders, hawking smokes, or serving cheap tacos. But the companies doing these things 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. You can follow suit by buying what everyone else ignores. Bill cites some compelling numbers he found, suggesting that, from 1927 until 2004, "value" stocks of the large- and small-cap variety returned 12.4% to 15.4% annually. "Growth" of all stripes couldn't even turn 10%.

But back to math. Bill's compounded those hypothetical returns over a 78-year time frame. That assumes you started investing the moment you slid out of the womb, and that you'd be content to slide into the grave without ever touching any of that hard-earned dough. Sound reasonable?

Reality doesn't bite
It's a bit of a stretch for me. 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 that you can get a blended historical value of 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 very sweet.

What does this mean? 
In essence: 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 saving, 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 Deeres, Caterpillars, and Yum!s, while the market is looking elsewhere.

And guess what? Some of those former tech superstars are now being treated like Cat, Deere, and Yum! were then. They're among the most maligned stocks on Wall Street. A guest pass will let you see what meets our current measure of cheap and -- better yet -- explain why.

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

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


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