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Pastimes : Triffin's Market Diary -- Ignore unavailable to you. Want to Upgrade?

To: Triffin who wrote (328)	10/12/2007 11:42:39 AM
From: Triffin	Read Replies (1) \| Respond to of 869

BC: MAXIMIZING "N" .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. You should be highly skeptical of any and all get-rich schemes ... except for the super-simple formula I'm going to show you below. Because this one really works. It works so well that it's been used by the world's billionaires -- from moguls of yesteryear such as Rockefeller and Ford to today's tycoons Carlos Slim and Warren Buffett. But enough already. Let's get to the formula. The formula It is, simply: FV = PV * (1+r) ^ n Where: FV = future value PV = present value r = rate of return n = time (or number of years) Compounding 101 Now, some astute finance brains will know that equation not as some mystical secret but as the "future value of money" (FVM) equation taught in college. The FVM formula simply states that your future wealth (FV) is a function of three variables: the amount of money invested today (PV), the rate of return generated (r), and the length of time in which that money is put to work (n). So maximizing future riches requires three steps. Step 1: Increase PV It takes money to make money. But by actively and consistently slivering off a portion of your earnings every month to save and invest, you'll have more and more of that money working for you. All things equal, the greater amount you invest today (PV), the greater wealth you'll build for tomorrow (FV). Step 2: Increase r Next, you'll need a way to grow that capital. Historically, the stock market has been the most effective wealth-building vehicle of all. Plowing your money into a low-cost index fund wouldn't be a bad idea. But if you really want to maximize r, you'll need to allocate a portion of your portfolio to the best segment of the market over the past 50 years: small-cap value stocks. The reason is simple. Unlike behemoths such as $115 billion Merck (NYSE: MRK) and $190 billion Johnson & Johnson (NYSE: JNJ) -- whose spectacular growth days are behind them -- reasonably priced small caps have tons of room to rocket. All things being equal, the greater your rate of return (r), the greater wealth you'll build for tomorrow (FV). Step 3: Increase n The last ingredient in our super-simple wealth building recipe: maximum time in the market. Look back at the equation. You'll see that n is an exponential function -- meaning that for every year you're not invested, you give up the awesome (almost magical) benefits of compounding. All things equal, the longer you're invested (n), the greater wealth you'll build for tomorrow (FV). Plug and chug To get a feel for the three-step process in action, let's go back in time to see what kind of wealth would have been generated had someone: Invested $40,000 in the stock market Started 10 years ago Divided the money among five stocks having: market caps less than $2 billion (to screen for small size), sales growth greater than 15% (to screen for above-average opportunities), and price-to-sales ratios of less than 1.5 (to screen for a good price). Here's what it would look like: Company Amount Invested 10 Years Ago AverageCompounded Return Over Past 10 Years Total Value of Investment Today Best Buy (NYSE: BBY) $8,000 33.9% $148,075 FTI Consulting (NYSE: FCN) $8,000 27.7% $91,892 Expeditors International of Washington (Nasdaq: EXPD) $8,000 24.2% $69,682 Florida Rock Industries (NYSE: FRK) $8,000 23.7% $66,947 Fossil (Nasdaq: FOSL) $8,000 25.9% $80,332 Total amount invested (PV) Avg. annual return of portfolio (r) Total value of portfolio today (FV) $40,000 27.6% $456,929 By having bought into five high-quality, reasonably priced companies while they were still babies, that $40,000 stake would be worth nearly $500,000 today. Of course, you can always fiddle with the numbers to generate different levels of FV, but our objective should remain the same: Maximize PV by sticking to an investment plan. Maximize r by devoting a chunk of your portfolio to superior small caps at attractive prices. Maximize n by investing as soon as possible and for as long as possible.