July 30, 2012
The stock market game is a compounding rate of return game. The main objective is to obtain a compounded annual rate of return as high as possible over the longest time interval within portfolio constraints of which the first is not to go bankrupt.
In one of its simplest forms, portfolio performance could be expressed as:
FV / PV = ( 1 + r ) t, where FV is the future value of the portfolio while PV is its present value.
The following chart illustrates the relationship between r and t when analyzed to determine how much time is required to double the initial investment.
(click to enlarge)
For instance, a long-term compounding rate of 10% (average market secular trend) would require about 7.29 years to double one's portfolio. It would require 7.29 years to double again, and yet another to double again. An endeavor of some 21.87 years to have one's portfolio grow by about 8 times.
The first 10 numbers of the doubling series have the following sequence: 2, 4, 8, 16, 32, 64, 128, 256, 512, 1024. It might take the same time to reach the next level as one progresses through the series, but this new level will represent the same output as what was achieved by all preceding levels. To reach the 10th level (1024), would require some 72.9 years at the 10% rate of return, but only 26.5 years at the 30% rate.
The above chart does illustrate that efforts should be put on reducing the doubling time as much as possible, and this within all the other limiting factors one might encounter while implementing a long-term trading strategy.
The game is not a one period game. It is a multi-period, multi-asset long-term game. The real goal is not the first doubling, but the last one in the series. You will double your initial stake in the first doubling time, but from the 9th to the 10th level, you will increase it by 512 times; as much as all the previous 9 levels and all this over the same time interval to achieve the first doubling. The 11th level will generate 2,048 times your first doubling. Something to think about.
IMHO, the real “holy grail” of investing is there, at the other end of the rainbow. And as funny as it may seem, it is built-in the game. All one can do is try to reduce as much as possible the doubling time and persevere long enough to reach the 10th doubling. But one can reach the 10th doubling if and only if he/she was able to reach the 9th, the 8th, the 7th and so on. It is a long journey, a long-term process and someone should be armed with patience, know-how, and determination.
Created... July 30, 2012, © Guy R. Fleury. All rights reserved