Jack's Journey: How $100,000 Became a Million Dollar Treasure
Revealing what it really takes to beat the market and the courage it takes to weather the storms.
Hey, my friend!
Long time no see, right?
Why have I been so quite?
First things first.
I was off the grid due to a nasty cold that knocked me out for almost two weeks. But I’ve bounced back and dived headfirst or neck-deep in Joel Greenblatt’s Magic Formula. Believe me, it turned out to be as mesmerizing as the name suggests.
However, I must confess, after doing that (and it took longer than expected), another investment strategy immediately sidetracked me.
I love writing these articles and at the same time you only can do one thing at a time. So I made a decision and focused on coding, testing and bug fixing again to make some progress with the new strategy. And again, it took longer than expected
I found myself stuck in a rabbit hole as deep as Mariana’s trench - I’m still stuck there, but I wanted to surface and give you an update.
Today, we’re going to look at how the Magic Formula performed in the past decade.
But hold your horses!
Before we jump into that, let’s unravel the reason why most people don’t strike gold in the stock market and what you can do instead.
Why most people lose in the stock market
Since 2008, I’ve been like Sherlock on steroids, trying to crack the code on outperforming average stock market returns.
Spoiler alert: It’s no cake walk! But possible.
Imagine an average stock picker in a marathon, trying to outrun Usain Bolt; yeah, not gonna happen. This fact is also reflected in the meager returns of roughly 1,9% annually that most folks garner from their stock investments.
Sounds familiar? At least for me it does.
This is sabotaging your investment game
Let me introduce you to the five usual suspects sabotaging your stock market game:
Knowledge Deficiency: Akin to a detective with no magnifying glass, many investors purely lack the necessary knowledge about stocks.
Yesterday’s News: They’re working on outdated infos.
Strategy: What’s that? They aimlessly wander without a blueprint.
Failing to Stick to Strategy: Even when they have a plan, they abandon it at the drop of a hat.
Emotions and Ego: They let short-term emotional turbulence dictate and sabotage their long-term decisions.
We will focus on the last bullet point in this article, since it is the biggest cause for failure.
How the world is set up
How does average or the mean look like? Most picture the stock market as a bell curve similar to the one below. On the left side are the underachievers, the middle represents the average Joe, and on the other side are the Wall Street wizards who are pumping gold out of the market.
Contrary to popular belief, this bell curve looks less like a perfect curve and more like a deflated balloon. So most people lose and just a few on the right make the big bucks. They beat the market.
Common songs
Here comes the naysayers from the Efficient Market Theory Camp, shouting across the street,
“You can’t beat the market”!
Their argument:
Information is democratized, everyone gets it at the same time, hence, no advantage.
That's a bunch of baloney if you ask me.
Think about it.
Remember the last time you found out about your favorite beer on sale when the shelves were empty?
Or the moment you remembered your anniversary only after your spouse’s frosty silence?
“If I had only known …” is a common and well-known song - in both - stock trading and in life.
We’re all swamped with information, but how often are we the last ones to get it - or act on it?
In the stock market, information is not consumed at the same speed by everyone.
If you take an analyst’s article, who do you think gets it first?
The editors and journalists. And what they do before they publish, who knows? The game is rigged.
The real market has an inherent lag - information is not processed instantaneously. This creates “inefficiencies” in the market and this delay provides savvy investors a window to profit because the market is still inefficient enough to make money.
When stock prices surge, someone is always ahead and the rest of us are just catching up with a higher entry price and less profits.
The million-dollar question now: How do you master this game?
The answer: Tools, discipline and a strategy.
Just like maintaining a workout routine, easy to say, hard to do.
Here’s the winning mantra of Wall Street wizards:
Education: They have the ABCs of stock market down to a T.
Information Timing: They’ve got the scoop, and they know how to use it.
Strategic Planning: They follow a carefully crafted plan.
Discipline: They stick to their tools and plan with the tenacity of a bulldog.
Emotional Control: They keep their emotions in check and let the strategy lead.
This shifts the odds statistically in their favor, but the moment they slack off, the tide turns against them.
But, here’s the rub:
Most folks are enamored by the stock market “rock stars” – Apple, Facebook, Amazon.
Why? Because a lot of people are talking about it. And when we listen to these guys you can’t come up with your own thoughts.
The mentioned “rock stars” have passed their heyday of growth and are cruising in the slow lane. They’re stable, sure, but don’t expect fireworks and above average returns. (Yes, there are exceptions and you also get my point.)
The secret to striking it rich lies in the dingy alleyways off Wall Street’s gleaming boulevard.
The catch?
It needs time and effort.
You may say, “But I have a day job and a family. How am I supposed to squeeze in time for this?”
A fair point, my friend. Let me answer this point later.
First, let’s talk about Jack.
A regular guy, armed with a solid strategy and $100,000 under his belt. Let’s follow him for ten years. Imagine you’re him.
The rules are simple; manage your portfolio twice a year (at the beginning and at the end) and weather all financial storms.
Sounds like a piece of cake, right?
Let’s dive in.
Meet Jack
Envision Jack, a spirited soul with a twinkle in his gaze, hunched over a well-worn wooden desk. His window offers a picturesque view of the neighborhood in Miami, punctuated by the ever-familiar oak tree he has observed through the changing seasons. His trusty laptop and coffee mug, inscribed with “To the Moon!” are his trusty sidekicks in this expedition.
The calendar reads 2013, and Jack is unearthing a treasure map of a lucrative investment approach. The wind is mumbling of unprecedented financial growth. Equipped with his sharp intellect and carefully accumulated $100,000, he decides to embark on this journey.
“Here we go!!”, hollers Jack, plunging in by investing his capital in this strategy.
Time is marching on.
The oak tree is flourishing in full bloom, mirroring the prosperity of Jack’s investments.
By the year-end, his account is swelling to $195,525.73. An astonishing 95% surge!
Overjoyed, Jack is performing a victorious moonwalk across the room.
The idea of splurging the newly earned cash flashes across his mind, but the voice of discipline prevails.
The accumulated wealth is stowed away for future use in 2014.
The ensuing year is not witnessing a meteoric rise, but Jack’s net worth is steadily increasing to $215,805.33. He can almost taste the ocean breeze as his metaphorical yacht continues its journey.
However, 2015 is bringing ominous storm clouds.
His wealth diminishes slightly to $209,684.46. As Jack grapples with the minor setback, a flicker of uncertainty creeps in. He stands firm on his course, boosted by the belief in a golden reward at the end of this journey.
As with every epic saga, after a dark night comes a dawn of hope.
2016 is greeting Jack with a robust net worth of $245,164.71 – a 16.9% increase!
The euphoric hymns of sirens are echoing in his mind.
2017 is a glorious year, with Jack’s wealth leaping to an impressive $506,308.41. Another whopping 105% gain plundered from the choppy seas of Wall Street.
He throws his arms up and screams. “I am unstoppable!” Only the neighbours dog answers with a bark while doing his business at the Oak tree.
However, 2018 is plotting a different trajectory.
Jack suffers a setback, his wealth diminishing to $418,036.83, leaving a palpable dent of $88,272.
The metallic taste of blood and defeat is potent, yet our seasoned sailor is far from finished.
On a momentous evening in 2019, after imbibing a portion of liquid courage, Jack dares to invest his whole wealth once more.
The next morning, nursing a hangover, he squints at his account. For the subsequent 12 months, he decides to give it a rest, battling a queasy sensation.
But as December 2020 rolls around, a miraculous aura touches the room.
Lo-and-behold!
Jack has become a millionaire, his net worth skyrocketing to a staggering $1,554,720.81.
A mammoth 371% windfall, indeed!
As the years flicker past, his fortunes are ebbing and flowing like the ocean tides.
By the close of 2021, he is sitting on a hefty $2,193,309.02.
However, 2022 greets him with a financial storm that sweeps a portion of his treasure away, leaving him with $1,410,963.60.
Jack feels rich as he sits at his desk and looks at the oak tree outside …
“What shall I do?”
He stands up from his desk and strolls out to the oak.
In the quiet shade of the towering oak tree, Jack reflects on his journey.
A lone tear is tracing down his cheek.
The past decade was not just about accumulating wealth; it was about the thrill of the chase, the winds of opportunity, the rock solid camaraderie with his faithful laptop, his coffee mug and the oak tree.
It's time to drop anchor and steer his ship to the harbor.
With a decisive mouse click, he sells his investments, securing his treasure safely on land.
The next day, a rare sight is greeting the neighbours - Jack, hosting a grand bbq under the sprawling oak.
The air is filling with chilling music and happy laughter, copious food is flowing, and children are playing around the majestic tree.
The adults, holding their breath, are listening as Jack narrates his adventurous voyage on the tumultuous seas of Wall Street.
And that’s the end of our tale.
Now, dear reader …
Imagine you have been Jack for the last 10 years an entire decade.
Look at the chart below and ask yourself.
What would you have done year to year?
Every year is a new voyage and life still happens.
Your car breaks down, your roof leaks, and that’s just the tip of the iceberg.
With each passing year comes a new hurdle, a new expense, a new challenge that tests your character. And here comes the iron fist by the end of 2019.
You’ve just lost 80k in the stock market, and your emotions wobble more than a jellyfish in a whirlpool.
Our emotions, my friend, are the storm we least expect when we invest.
Read that again.
Now, let’s say you have this treasure map, this golden strategy. It won’t fill your coffers every year, but if you stay the course, your treasure chest can start bursting at the seams.
“But wait,” I hear you shout from the back, “that sounds rough! And who knows what the future will bring …” You’re absolutely right, mate.
One thing is certain - uncertainty, and yet it’s doable because it’s manageable, just not for everyone.
It may sound simple to stick to a strategy and turn off emotions, but it’s as hard to stick with we are walking a tightrope during a storm.
We know we have to focus on the horizon to make it, and yet we keep looking into the abyss. Does that benefit us?
Now ask yourself, can you weather the storm for an entire decade?
Picture your investments dancing to the beat of this strategy while you scrutinize your stocks each day.
It’s like querying your partner each morning, “Do you still love me?”
Some days, you receive a tender embrace; others, you find yourself banished to the sofa. This is the stock market’s capricious dance with you.
Indeed, Mr. Market is a maniac.
But only our emotions bring him to life.
A Strategy that fits to you
You need a strategy you trust and that fits to your emotions aka risk profile, because the sea of investment will always be turbulent.
Doubt, like a lurking shark, is inevitable.
Big investment companies have a variety of strategies for every risk type.
If they weren’t raking in profits, they’d be as extinct as the dodo. Like in any area of life and industry, there are those that sink, and those that sail through every water.
“I’ve got a job, a family, a life… and my wife would kill me.”
I hear you loud and clear.
At the end, you have to decide what you want.
Let’s look at it this way.
Would you challenge Tom Brady to a quarterback throw-off or attempt to outscore Lionel Messi?
Are you trying to turn my hair white with worry?! No way!
We understand these pros have spent hours perfecting their craft. It’s their life, their passion.
And yet, when it comes to investing, many jump in, expecting to outsmart the pros with a below-average toolkit and making all the top five mistakes.
I hate to break it to you, but that’s like bringing a rubber duck to a gunfight.
Sure, beginners can get lucky. I was lucky too.
I got a bullseye with my first dart throw in back in 2008. Now I know and accepted, that it was pure luck.
But relying on luck in investing is like betting your house on the lottery - it’s not the smartest move.
You need a strategy that you follow, no matter what. Period.
Let’s dive into Jack’s investment strategy that delivered a jaw-dropping 1,400% return over ten years.
Just imagine, if you had planted a $100,000 investment seed in 2013, you’d be sitting on a cool $1.4 million by 2022!
Here is the truth.
I’ve tossed Jack’s strategy in my data time machine and guess what?
It was the Magic Formula.
But there is a big BUT.
The mistake was mine - I had coded it wrongly!! The code had some bugs that produced this dream chart.
After fixing the bugs, the returns have been devasting.
It produced on average 1.3% per year.
Therefore my takeaway is this.
I guess the Magic Formula doesn’t work anymore.
But you can tweak the strategy
When you use a stop loss of say 5% the average return increases to roughly 7.3% annually.
Way better, but I wouldn’t use it, anyway.
It relies only on two parameters and they don’t work anymore as a sound filter for potent stocks.
We must become more sophisticated.
Therefore, I won’t stop here.
I’m currently investigating a new strategy.
Here is why.
The right side of the curve exists - it’s real.
And I want to get there.
Remember, there’s always a treasure waiting to be discovered. You don’t have to find all of them.
Your journey as an investor will be fraught with peril - economic downturns, market crashes, calculated investment losses - they’re all part of the adventure.
But don’t let these discourage you.
To truly succeed in the world of investments, you need more than just a solid strategy or a well-diversified portfolio.
You need the courage to dive into the partly unknown, the patience to wait out the storm, and the grit to invest again after each and every stop loss was activated.
Many investors fail because they jump ship at the first sign of a storm.
Remember: Never set sail with more gold than you can afford to feed to the sharks.
Conclusion
The story of Jack exemplifies the nerve-wracking ebbs and flows that are intrinsic to the market, with fortunes rising and falling like ocean tides.
Yet, through Jack's journey, we learn that it is not the promise of immense wealth that should draw us into the world of investment. Instead, it is the journey itself, marked by the grit, resilience, and unyielding courage needed to weather financial tempests.
Jack's story is a testament to the power of staying the course, reminding us that the rewards of disciplined, long-term investment can far outweigh the temporary uncertainties and setbacks.
While not everyone might become a millionaire like Jack, every investor can indeed learn from his experience.
Just as an intrepid sailor learns to respect the power of the sea, we must learn to respect the rule, using a strategy and patience as our compass.
The essence of investing isn't about making quick riches but understanding and riding the waves.
As Jack's story demonstrates, the most valuable riches one can gain from the market are the emotions you feel, the lessons you learn from them and the character you develop.
Behind the Scenes
Progress:
- The Magic Formula Prototype is done.
- The next investment formula ValueVantage 2.0 is being tested and bug fixed right now.
Plans:
Continue with ValueVantage 2.0
Where’s my head?
The last six weeks showed me one thing again.
Plans change. But without a plan there is no change.
I had days where I wasn't in the mood for debugging.
Guess what helped me? Chunking it down to the smallest thing I can do.
Do it.
Progress is often hidden behind baby steps.
Until we meet again, au revoir.
Michael
Disclaimer:
The information in this article is my personal opinion. It is not consulting, nor does it constitute investment recommendations.
I do my research carefully and follow my personal investment strategy.
The stock market is a complex building with its own rules. They are no rules set in stone, like the rules of physics.
Therefore, use the contents of this newsletter at your own risk. Investing in the stock market can always lead to a total loss of the capital invested.