EVALUACIÓN DE PROPUESTAS

of Making Money

3

What is the fi rst thing you notice about the stock market’s performance? While stocks may be volatile in the short-term, it always goes higher and higher in the long-term. The stock market is always on a long-term uptrend. This means that each low point is higher than the previous low and each high point is higher than the previous high!

Over the last 50 years, the S&P 500 achieved an annual compounded return of 12.08% with dividends reinvested. Does this mean that the stock market increased by 12.08% every year? Of course not! In fact, in some years, the S&P 500 dropped by 45% while in some years, it doubled in value. In the long run, your money would have increased by 12.08% annually.

Now, will the stock market continue to increase in the next 50 years? Will this uptrend continues? Well, not only do most people think it will continue, but many believe that it will increase at a faster rate! You can see from the chart that the stock market grew much faster from 1990-2000 than it did from 1980 to 1990. At the same time, 1980-1990 performed much better than 1970-1980. So, the best years of the stock market may be yet to come!

Chart 1: 50 Year History of the US Stock Market (1957-2006)

“Microsoft product screen shot(s) reprinted with permission from Microsoft Corporation.”

Screen capture from www.moneycentral.com

Chart style: Line Candlestick HLC OHLC

Intraday 5 day 10 day 1 month 3 month 6 month Year to date 1 yr 3 yr 5 yr 10 yr

Jan 1957 Jan 1965 Jan 1970 Jan 1975 Jan 1980 Jan 1985 Jan 1990 Jan 1995 Jan 2000 Dec 2006 Price history - $INX (1/1/1957 - 12/1/2006)

3,000% 2,500% 2,000% 1,500% 1,000% 500% 0% -500%

CHAPTER 3 THE IDIOT-PROOF WAY OF MAKING MONEY 45

What is the rationale for stock market prices to keep going higher and higher? Well, stock prices are driven by company profi ts. The higher the profi ts of a company, the higher its shares will be priced. Over time, infl ation pushes prices of a company’s products and services higher. For example, a cup of coffee today costs twice as much as it did ten years ago and you can bet it will be even more expensive in the year 2016. As the world’s population grows and gets richer (especially in developing countries like China and India), there are more and more people that companies can sell their products to. Higher prices at higher volumes result in higher and higher profi ts for companies. This continuous growth in earnings over time keeps pushing stock prices higher.

Now take a look at the stock market’s performance over a shorter- term period of ten years (1970-1980) in Chart 2 below.

Chart 2: 10-Year History of the US Stock Market (1970-1980)

“Microsoft product screen shot(s) reprinted with permission from Microsoft Corporation.”

As you can see, in the short-term, stock prices randomly move up and down. In fact, from 1970-1980, the market rallied up three times and went down two times. If you had bought stocks at one of the peaks in 1973; you would have had a massive heart attack when the market plunged by more than 46% the next following year (1974).

Screen capture from www.moneycentral.com

Chart style: Line Candlestick HLC OHLC

S&P 500 Index Dow Jones Industrials 60% 50% 40% 30% 20% 10% 0% -10% -20% -30%

Jan 1970 Jan 1971 Jan 1972 Jan 1973 Jan 1974 Jan 1975 Jan 1976 Jan 1977 Jan 1978 Jan 1979 Jan 1980 Dec 1980 Price history - $INX (1/1/1970 - 12/31/1980)

1973: If you brought stocks here, you would suffer a 46% loss in a year

Half your savings would have been wiped out if you had got scared off and sold everything you had at the bottom. This is exactly why most ignorant investors lose their life savings in stocks and fi nd it extremely risky. However, had you understood how stock markets worked in the long-term and held on to your stocks, you would have gotten a 20.7% return within fi ve years! Better still, if you had bought even more stocks when it hit the bottom in 1974, you would have doubled your money in fi ve years’ time (1980). If you held on to your stocks till today (2006), your money would have increased 22 times! A $45,000 investment would make you a millionaire today.

Now let’s take a look at the actual gains and losses from the S&P 500 year-on-year. Take note that these annual returns do not include the dividends you would have received by holding the stocks. So in actual fact, the fi gure is much higher than this.

From the table, you can see that in a 50-year period, there were 36 winning years and 14 losing years. This means that if you had invested your money in the stock market for a one-year period, your chance of loss would be 14 out of 50 or 28%. Your probability of making money would be 72% (36 out of 50)! Not bad! But, what if we had stayed invested for a minimum of fi ve years?

Table 1: 50 Years of Gains & Losses from the S&P 500 (1-year periods)

* Source: calculated from the S&P 500 Index’s closing prices from www.moneycentral.com * Does not include dividends reinvested

1957 -13.40% 1967 +20.09% 1977 -11.50% 1987 +2.03% 1997 +31.00% 1958 +36.90% 1968 +7.66% 1978 +1.06% 1988 +12.39% 1998 +26.67% 1959 +8.03% 1969 -11.36% 1979 +12.31% 1989 +27.25% 1999 +19.53% 1960 -3.00% 1970 +0.10% 1980 +25.77% 1990 -6.56% 2000 -10.14% 1961 +24.28% 1971 +11.67% 1981 -9.73% 1991 +26.31% 2001 -13.04% 1962 -11.80% 1972 +15.63% 1982 +14.76% 1992 +4.48% 2002 -23.37% 1963 +18.89% 1973 -17.37% 1983 +17.26% 1993 +7.06% 2003 +26.38% 1964 +12.97% 1974 -29.72% 1984 +1.40% 1994 -1.55% 2004 +8.99% 1965 +9.06% 1975 +31.38% 1985 +26.36% 1995 +34.13% 2005 +3.00% 1966 -13.09% 1976 +19.15% 1986 +14.62% 1996 +16.36% 2006 +11.89%

CHAPTER 3 THE IDIOT-PROOF WAY OF MAKING MONEY 47

From the table above, you can see that there were altogether ten ‘5-year periods’ in the last 50 years and every period returned a positive fi gure. This means that if you kept your money invested for at least fi ve years, your chance of loss would be ‘zero’. Your chance of gain would be 100%! Now, I am not going to go so far as to suggest that investing in ANY fi ve-year period is going to give you guaranteed returns. In fact, if you had invested at the very peak of the dot-com bubble in March 2000, you would still make a very slight loss of 10% after fi ve years (March 2005). However, this is an isolated case as March 2000 was a time when the markets were insanely way overvalued. What I CAN SAY is that when you stay invested for a 5-year period, the chance of loss is negligible, and the chance of gain is very high!

What I am confi dent of saying is that if you stay invested even longer, say a ten-year period, then the risk of loss is truly ‘zero’ and the chance of gain is 100%. In table 3 below, you can see that for every 10-year period in history, the chance of loss is 0% and the chance of gain is 100%! 1957-1961 +54.87% 1982-1986 +97.77% 1962-1966 +12.27% 1987-1991 +72.23% 1967-1971 +27.09% 1992-1996 +77.62% 1972-1976 +5.26% 1997-2001 +54.99% 1977-1981 +14.04% 2002-2006 +21.66%

Table 2: 50 Years of Gains & Losses from the S&P 500 (5-year periods)

* Source: calculated from the S&P 500 Index’s closing prices from www.moneycentral.com * Does not include dividends reinvested

Table 3: 50 Years of Gains & Losses from the S&P 500 (10-year periods) 1957-1966 +73.87%

1967-1976 +33.77% 1977-1986 +125.36%

1987-1996 +205.88% 1997-2006 101.26%

* Source: calculated from the S&P 500 Index’s closing prices from www.moneycentral.com * Does not include dividends reinvested