Do You Have What It Takes To Get Rich “Quick

Posted: Oct 03, 2012 12:01 AM

It is probably a safe assumption that most people invest in the stock market with a goal of creating wealth (i.e. "getting rich") over time. And I'm guessing that a fair number of people - especially those seeking investment guidance on the internet - would prefer to "get rich" sooner rather than later. Please note that this is not meant in a derogatory manner. No, I'm simply suggesting that most investors likely have an investment time frame of 10 to 15 years as opposed to 40 or 50 years. As such, those looking for their portfolios to work for them within a 10-15 year time horizon don't necessarily have time on their side.

This is not to say that investors can't "get rich quick" these days. Despite the relatively crummy performance of the stock market (SPY, DIA, QQQ, MDY, IWM) over the last 12 years, there have been opportunities for profit and ways to "get rich." The question though is if the average investor is up for the task.

For example, up until just recently, the investing public had been schooled by the mutual fund industry to invest for the long term. The simple pitch to investors was to put your money in a good fund such as Fidelity Contrafund (FCNTX) or American Funds Growth Fund of America (AGTHX) and leave it there. Those selling you such an approach had history on their side as they could say with certainty that the stock market had only experienced only 2 negative 10-year periods in the last century. In addition, if investors would just have some patience, they would be rewarded in the long run as the stock market had NEVER been a loser over a rolling 20-year period.

Then the calendar changed. To the surprise of many, the computers didn't crash on 1-1-00 as the new century was ushered in. But since the beginning of 2000, things have not been so pleasant for stock market investors. During the first 10 years of the new century, the S&P 500 saw double digit declines four times (-10.14% in 2000, -13.04% in 2001, -23.37% in 2002, and -38.49% in 2008). As a result, the rolling 10-year period that began in 2000 saw a net decline of -24.12%. And as of 9/30/2012, the S&P 500 cash index still sports a cumulative loss for the new century.

Those growth funds that were all the rage in the 1990's have actually fared worse. According to the Lipper, their Large-Cap Growth Fund Index has produced a cumulative return of -17.38% since 1/1/2000. Thus, after 12.75 years, investors in the growth fund index will need a gain of 21.03% from here in order to get back to breakeven. Ouch.

As such, I believe that investors are now "long term" as "long" as they are making money. And if they begin to lose money, the fund inflow/outflow data suggest that the investing public is not shy about cutting and running these days.

The problem here is that the public was sold on the wrong idea. Long-term investing still works - just not the way the mutual fund industry pitched it to everyone. You see, the fund industry wanted you to put your money in their funds and leave it there - forever. And because of the secular bull market in stocks between 1982 and 2000, most people bought in.

I can tell you from first-hand experience that the concept of managing risk was all but dead by the time the middle of the 1990's rolled around. The "Crash of '87" was a distant memory and all ensuing market declines had been quickly erased as the market marched merrily higher. And those of us that focused on risk management? Well, we were publicly scoffed at.

The Answer

However, I can also tell you that what we now call "active risk management" (something that was once referred to as "market timing" - you know, the old idea of "buy low and sell high"... I know, I know, this is sheer folly - why would anyone ever attempt to implement such a silly strategy) never stopped working and continues to perform well today.

I am also here to tell you that an "active risk management strategy" - where one moves in and out of the market based on the overall market environment - tends to perform pretty darn well over the long-term. Thus, investing for the "long term" can and does indeed still work well - and yes, one CAN still "get rich quick" (over a 10-year period) - if you are utilizing an approach designed to function in both secular bull AND secular bear market cycles.

But there's a catch. The problem is that employing such tactics requires some expertise, some effort, and most importantly, a healthy dose of determination. These are three qualities that unfortunately, the average investor doesn't possess in spades. Please don't take offense at that last statement. I am NOT insinuating that the investing public is dumb. No, in many ways, the average investor has bit-time advantages over the pros. I am simply saying that most investors probably haven't had 30 years of experience with the stock market and that their jobs and family responsibilities likely don't leave them much time to commit to the business of investing. In addition, there are very few sources of reliable, independent, objective advice available to individual investors.

Then there is the issue of confidence/determination. Although the market has been a very rough ride lately, I can continue to implement my active risk management systems because I know that regardless of how the most recent stretch of trades has turned out, in the long run, the systems will get the vast majority of market calls right and keep me on the right side of the really important trends. However, most investors tend to give up on a strategy if it struggles for even a month or two.

This brings me back to the title of this morning's meandering market missive: Do You Have What It Takes To Get Rich Quick? You see, I can point to a handful of "active management" strategies that have produced returns of at least 20% per year for a very long time. And remember, if one earns 20% per year, money doubles every 3.6 years. So, if you invest $100,000 today and can earn 20% per year, you would have $605,960 in 10 years. And if you can earn 25% return, that $100,000 would turn into nearly $1 million. I don't know about you, but in my book, turning $100K into $1 million over a decade would definitely qualify as getting rich quick. However, most investors don't have the internal fortitude to implement such strategies over the long haul. Here's why: The bottom line is that ALL investment strategies stumble from time to time. And when they do most investors give up quickly and go searching for something new.

The problem is that these investment strategies aren't like bank accounts - you don't earn interest day in and day out. No, any strategy that is capable of producing big rewards isn't going to be easy to live with at times. Not all trades will be winners and yes, there will be losing trades and drawdowns - you can count on it. And it is during these "difficult" periods that many investors (who lack the understanding of the way system works as well as the confidence in the system to just keep going during the tough times) give up. And this is the reason one of my oldest friends in the business is famous for saying "the average investors doesn't have the patience to get rich quick."

So, if you are indeed looking to "get rich quick" (over the next 10 years), my advice is to find a system that (a) works well most of the time, (b) you can thoroughly understand and can live with during good times and bad, and then (b) stick with it - yes, even when the going gets tough.

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Positions in stocks mentioned: SPY