Wednesday, August 8, 2012

The blog takes flight


As the saying goes, "time is money"; and if you look at the interest rates on today's bank accounts, it is certainly not time well spent. Currently, Citibank offers a 0.01% annual percentage yield (APY), which means if I keep $1000 in my checking account, at the end of the year it will have yielded a paltry 10 cents. In 10 years time, I will have finally made my first dollar.

Thanks, but no thanks
In contrast, if that same $1000 had been invested in the stock market, the story is much different. Despite the dot-com bust in 2000-2002 and the more recent subprime mortgage crisis of 2008, the S&P 500 index has averaged a 9.2% annual growth over the past 45 years [1]. This means if all I did was invest in the top 500 publicly trade companies, in 10 years time my portfolio would grow a whopping 241%. That same $1000 I put in my checking account for a $1 return would have netted me $1410. And this is with almost zero work on my part: no stock research whatsoever.

So what happens when you put some effort into it? Warren Buffett is one of the most successful investors of all time, and with him at the reins of Berkshire Hathaway, the company has enjoyed an average annual return of 19.8%. This means over the last 45 years, he has increased his wealth over 5000 fold. Sure beats leaving it with Citibank.

The power of exponential growth
In the words of Albert Einstein, "Compound interest is the most powerful force in the universe" (some discussion about this claim [2]).

So somewhere between the decent 9.2% returns of the S&P 500 and the astronomical 19.8% returns of Mr. Buffett should lie the expectations of an intelligent investor.

That is the purpose of this blog: to document my own discoveries, triumphs, and failures as I begin my foray into the investing world in an attempt to "beat the market." It is my intention to keep my ideas and impulses open and transparent. The purpose being two-fold: to simultaneously educate others about how to invest their money and to keep myself under constant scrutiny in my ventures.

It is worth noting that I have no prior financial or investing experience nor education. But I shall treat this not as a liability, but as an asset. I will discuss and test the theoretical foundations behind investing, taking nothing for granted. Ultimately, my goal is to gain a comprehensive understanding of how the markets behave and develop a series of investment strategies to maximize my returns.

On a more personal level, I will treat this as a fun, interesting, and worthwhile endeavor. Fun in the sense that there's some degree of speculation (read: gambling) involved. Interesting in that there will be mathematics and statistics in the process. And worthwhile in that I will (if I do my job right) be making a decent amount of money.

References

[1] http://www.berkshirehathaway.com/2011ar/2011ar.pdf
[2] http://quoteinvestigator.com/2011/10/31/compound-interest/

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Obligatory Disclaimer

The author is not qualified to give financial, tax, or legal advice and disclaims any and all liability for this information.