Here's a simple, two-step plan to help us all retire happy and wealthy:
- Work at jobs you enjoy.
- Get aboard the compounding train.
I know what you're thinking: It's not that easy. Well, it is, but it takes discipline. And since I hope you've already completed step 1, let's focus on step 2.
All aboard!
How do we get this trip going? We'll start by investing in stocks that should generate good returns over the next two to three years -- rather than over the next two to three months. Why? Because while it's difficult to know what stocks will do over the next few months, as the performance of great businesses becomes more predictable over longer time frames. And the key is to buy them at great prices.
Legg Mason's (NYSE:LM) Bill Miller, arguably the greatest fund manager over the past 15 years (he's beat the market in every one of them), has a term for this philosophy. He calls it the "time arbitrage" theory. Here's how it works.
Miller scoffs at Wall Street's obsession with short-term results and works to use it to his advantage. He's more than happy to invest in the "dead money" stocks other professionals don't want. Because these stocks supposedly aren't going anywhere in the near term, they're oversold, and so he gets them cheap. And he waits. Two to three years down the line ... voila! Miller has another great year. And he just keeps filling the pipeline.
Compounding builds wealth
Miller's performance must be astronomical, you're thinking. Well, yes and no. Over the life of his fund, Miller has averaged 15.9% annual returns.
That's not so flashy if it just happened once, but consider the power of compounding -- also known as the most powerful force in the universe -- as it keeps happening over and over again:
|
Year |
Total Return |
$1,000 Turns Into ... |
|---|---|---|
|
3 |
56% |
$1,560 |
|
5 |
109% |
$2,090 |
|
10 |
337% |
$4,370 |
|
20 |
1,814% |
$19,140 |
While a time arbitrage strategy will get you only 50% returns over three years, look at how the returns accelerate over time. After 20 years, you've made nearly 20 times your money.
But, yes, it takes time. That's why we need to start today.
Opportunities are there all the time
If you don't think there are good "dead money" stocks in the market every now and again, consider that at various points following the turn of the new millennium, Goldman Sachs (NYSE:GS), UPS (NYSE:UPS), Cephalon (NASDAQ:CEPH), Costco (NASDAQ:COST), and Wal-Mart (NYSE:WMT) barely budged.
All these good companies have posted incredible long-term returns, but the market temporarily soured on them for myriad reasons. Slowly but surely, however, they've started to make money for investors again.
Stock market treasures at flea market prices
The key is recognizing where the bargains are in the stock market and taking advantage of them.
That's where lead analyst Philip Durell and the rest of the Inside Value team can help. We go where the opportunities are. Today, the market doesn't seem to like large, high-quality health-care companies such as UnitedHealth Group (NYSE:UNH). That's fine with us. We're more than willing to wait for them to come back into the market's favor and reap the rewards.
