The difference between stock market

investment and speculation.

Using the Rule of 72 and a passive
S & P saving strategy
to achieve investment success.

Christopher M. Quigley
B.Sc., M.I.I. (Grad.), M.A., QFA.
The issue of successful stock market investment affects us all. Even if we are not directly
engaged in the industry, all of us will need some form of pension to fund our retirement.
Whether we like it or not most of our retirement funds will find their way into the financial
markets. For this very reason, the issue of pensions has moved politically centre stage; in
particular the investment strategies used to administer pension funds. Due to
mismanagement, mainly over the last decade, many retirement portfolios have become
under-funded at best, or, at worst, totally bust. This situation is a direct result of the
managed funds having been speculated rather than invested. Many cynics will say that the
whole investment environment today has more of the characteristics of a casino than of a
professional market of equities and, therefore, they doubt that one can ever achieve a
faithful and fair return on capital. However, this view is erroneous. This essay sets out to
explain how to achieve superior pension investment returns through a simple yet powerful
investment rule: the rule of 72. This rule is based on investment and not speculation yet if
you faithfully apply it your returns, over time, will be spectacular. Many believe that such
degree of return is only possible through speculative activity. They are wrong and I will
explain.
Benjamin Graham, the father of security analysis, and mentor of Warren Buffett, long
believed in the stock market as a means to achieve financial freedom. The wealth he
accumulated and the school of successful investment gurus he educated are testament to his
insight and genius. The key to his formula has always been one simple concept: VALUE.
His central message never changed and in a financial community which bores easily, his
conservative investment style became "classical" and then "old fashioned". Graham
ultimately derided the fads and trends that engulfed Wall Street and he eventually gave up
trading and managing funds. However, his "baton" of value was spectacularly taken up by
his acolyte, Warren Buffett, who went on to become the most successful investor of all time.

Buffett, like Graham, believes the policy of investing does not require high qualities of
insight or forethought, as long as some simple rules are applied. In essence these simple
rules are:
1.

Safety of Capital

2.

Adequacy of Return

An operation that does not seek both of the above is not an investment but a speculation.
Now in today's complex, volatile, media-driven and fast-moving market environment how
does one actually apply these simple rules? The essential thing to realise is that when you
buy an equity, you are purchasing part of a business. Investment is most intelligent when it
is most business like.
For over the two decades, for pension purposes, I have been educating clients on how to
achieve excellent pension returns through passive saving into the S & P 500. This strategy
ensures safety of capital and good return because ones hard earned money is spread over
500 companies (thus ensuring spread of risk) that pay good dividends (thus gaining good
return).

The rule of 72.

The 'Rule of 72' is a simplified way to determine how many years an investment will take to
double, given a fixed annual rate of interest. Thus by dividing 72 by the annual rate of
return, investors can get a rough estimate of how long it will take for the initial investment
to double itself.
Our target annual rate of return is 10%. (This is the rate the S & P has grown, on average,
over the last 30 years). This average annual return objective when married to the
miracle of compounding turns a consistent savings fund into an excellent retirement nest
egg. Let me demonstrate.
When you divide 10 into 72 you get 7.2 . This means that it will take 7 years (approx.) for
ones fund to double:
Year 1.

1000 X 1.10

1100

Year 2.

1100 X 1.10

1210

Year 3.

1210 X 1.10

1331

Year 4.

1131 X 1.10

1464

Year 5.

1464 X 1.10

1611

Year 6.

1611 X 1.10

1771

Year 7.

1771 X 1.10

1949

The average pension investment cycle is about 40 years (25-65 = 40), therefore if you
focus on achieving an annual investment target of 10% you can get 6 doublings (approx.)
of your investment over the 40 year period. Thus through the magic of compounding an
investment pot of 20,000 Euro or a, fund saved into through dollar cost averaging (see
addendum 3), can grow into a handsome pension fund of 1.24 million Euro after 6 such
doublings.
Year 1-7.

20,000 X 2

40,000

Year 8-14.

40,000 X 2

80,000

Year 15-21.

80,000 X 2

160,000

Year 22-28.

160,000 X 2

320,000

Year 29- 36.

320,000 X 2

640,000

Year 37- 42.

(Rounded up)

640,000 X 2

1,240,000

Conclusion
Despite appearing to be a complex matter, the path to investment success can be quite
simple, if you have a proven strategy.
By applying our earnings growth and dividend investment approach through our S & P
savings strategy the average investor, using discipline and patience, to achieve financial
independence over time.
However, time is of the essence.
----------------------------------------------------------------------------------------------------------------------------- --------------Read Christopher M. Quigleys decade of published essays on Trading & Investment at MarketOracle.Co.UK.

http://www.marketoracle.co.uk/UserInfo-Christopher_Quigley.html
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Addendum 1.

Investing: Compounding & The Power Of Starting Saving Early:

In order to emphasize the power of compounding, I am including this extraordinary study, courtesy of
Market Logic, of Ft. Lauderdale, FL 33306. In this study we assume that investor (B) opens Personal
Pension Plan at age 19. For seven consecutive periods he puts $2,000 in his fund at an average growth
rate of 10% (7% interest plus growth). After seven years this fellow makes NO MORE contributions -he's finished. A second investor (A) makes no contributions until age 26 (this is the age when investor B
was finished with his contributions). Then A continues faithfully to contribute $2,000 every year until he's
65 (at the same theoretical 10% rate).
Now study the incredible results. B, who made his contributions earlier and who made only seven
contributions, ends up with MORE money than A, who made 40 contributions but at a LATER TIME.
The difference in the two is that B had seven more early years of compounding than A. Those seven early
years were worth more than all of A's 33 additional contributions.

Addendum 2.

True rate of inflation

Source: ShadowStats.Com

Note: with an average inflation rate of 6% per annum general price levels, using the rule of 72,
will double every 12 years, equating to 3.5 doublings over our rounded up 42 working years.
This means that a basket of goods that costs 20,000 Euro today will have a nominal value of
240,000 Euro at our sample retirement age. In other words those who work but do not have an
inflation proof form of income are going to end up the paupers of the future and I am afraid
that this is going to be the norm for the majority in the western world.
Addendum 3.
Dollar-Cost Averaging
Dollar-cost averaging is carried out simply by investing a fixed dollar amount into your
investment instrument at pre-determined intervals. The amount of money invested at each
interval remains the same over time, but the number of shares purchased varies based on
the market value of the shares at the time of a purchase. When the markets are up, you buy fewer
shares per dollar invested due to the higher cost per share. When the markets are down, the
situation is reversed and you purchase a greater of number of shares per dollar invested. It's a
strategic way to invest because you buy more shares when the cost is low, so you get an average
cost per share over time, meaning you don't have to invest the time and effort to monitor market
movements and strategically time your investments.