All these investment strategies
Updated: May 4, 2022
Hello and welcome! :)
This article is about some of the different investment strategies, that you can choose from. I will dive into the most simple one, which is also what I teach about in my courses. The article starts with a story, because stories are nice. Let's go.
On the 16th of October I was at a friend's 30th birthday party. Here I spoke with one of my university friends, Sebastian, who told me about a book that apparently beats the market return (my skepticism alarms started ringing, along with my interest alarms). We all want to beat the financial markets, right?
Sebastian shared Joel Greenblatt's story of a boy named Jason, who owns a gum company and makes good money on it. Jason's Gum Shops earnings yield is high (it earns well compared to the price of the stock) and its return on capital is great (it's very good at earning a return on the investment that it does).
Apparently following these two factors; earnings yield + return on capital is all you need to consistently beat the market... That sounded too good to be true, so I decided to buy the book, and I finished ninja-reading the next weekend (meaning at night when my sweet girlfriend was sleeping). To be fair, it's called "The little book that beats the market", so it was a quick-read. Also I'm a nerd 🤓.
"But Martin, what does this have to do with Investment Strategy?" Patience my friend, patience.
In the book, Joel Greenblatt tells about his magic formula that beat the market from 1988 to 2009 by 14% annually. That's a lot (!). In total it ramped up an average of 23,8% annually only using the earnings yield and return on capital numbers as a screener for the companies to invest in:
This means that if you put in 10.000 DKK (yes I'm Danish), you would have made 885.000 DKK. That's 88,5 times your money in 21 years.
That's outright insane and reading this in the night my mind immediately went to the conclusion; "tomorrow morning I'm taking your ass to the computer, and we will use this magic formula, and become rich!".
Now it's Monday, I just had my coffee, and fortunately my day-brain decided to do some research. It appears that his strategy didn't work well the last 10 years. Especially the last 5 years. DAMN IT! (and thank you Yuval Taylor for the great back-testing). I checked more magic formula testing sites, and they all come to the same conclusion. Hmm... It appears that a fool-proof strategy using only two numbers to screen, doesn't exist. No magic I guess... However I need to say that over long periods of time this strategy should work, but you need to trade a lot and not be affected at all by your emotions, which leaves out a lot of people I guess.
So what do you do?
Reading the book and doing the research afterwards made me think "How do people, who are not investment bankers or fund managers, figure this sh... stuff out?"
Well fortunately I've read a handful more books, and the best one still is "The Intelligent Investor" by Benjamin Graham. I think our guy Yuval would agree too. Mr. Graham (now in heaven, bless him) writes about Value investing. To not bore you with that too, it comes down to investing in really great performing companies, which are currently being sold on the stock market way too cheap (under their intrinsic value, as Mr. Graham puts it). This is all fine, I use it myself on 50% of my portfolio, but it takes time. A lot of time. Most people with jobs and homes and kids, just don't have that time.
..."So what to do? Growth-stocks strategy? Day-trading strategy? Martin, what do I do??"...
The Passive Index Strategy
The other 50% of my portfolio follows this. Fortunately for us, the entire stock market has put out great numbers over the last 200+ years. Much greater numbers than investing in bonds, gold and certainly better than keeping it on the bank account:
On average the stock market has since it started, returned ~6-7% every year according to where you look.
So if you stay in the market, and we take an example of 7%, you double your money every 10 years (because it compounds).
So if you invest 100.000 DKK when you are 25 and take everything out when you go on pension at 65 (excl. tax) this happens:
Age 35: 200.000 DKK
Age 45: 400.000 DKK
Age 55: 800.000 DKK
Age 65: 1.600.000 DKK
You have 1.6 million DKK for pension, woop woop! If you leave it in your bank account at 1,5% inflation, your 100.000 DKK would be worth almost half, weep weep :'(
BUT HOW?
You can be invested in the general financial market by buying and holding passive indexes. These are called ETFs (Exchange Traded Funds) and basically copy the market they follow. An ETF can for example follow the S&P500 index which covers the largest 500 stock market companies in the US, or it can follow the gold price, oil price, the top companies in Europe, etc. The list goes on. So you can expose yourself to an entire market or sector, by simply buying a few different ETFs. Delicious!
ETF's are passive meaning that they simply follow and copy the price of a market or sector. There is no one hired to actively trade companies in and out of the ETF. This means that they can run on very low fees, which in turn leaves more money for us. Also delicious! Over time (15+ years), doing this actually beats most investment strategies and certainly most private investors.
Underneath is a list of ETFs for inspiration:
The iShares World ETF which copies a wide range of companies spread across the globe. Yearly Fee: 0,2%
The iShares Core S&P500 ETF which copies the S&P500 index like mentioned before. Yearly Fee: 0,03%
The iShares Global Clean Energy ETF which copies a range of sustainable companies spread across the globe. Yearly Fee: 0,42%
Do you want to learn more?
Sign up to my "Basics of investing" course where you will learn all the basics of investments and get the right foundation and knowledge:
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