Synopsis "Portfolio Take-off: Stock Market Theory"
The secret is out! Investing in the stock market is like piloting a plane. Portfolio will take-off after taxi-time on the runway for about 15 years. Once airborne, it will continue to climb into the zone of unlimited growth. We do not hear anything about this in the press. It is one of the best-kept secrets on the stock market. Now, the book unveils the secret in detail. Our desire to provision our future by growing our money prods us to invest in the stock market. Randomness and causality are the two forces driving its dynamics. Randomness gives rise to the probabilistic behaviour of portfolio returns, while causality generates their deterministic behaviour. The play between randomness and causality, between probability and determinism should guide our investing approach, as well as the management of our portfolio. The influence of randomness on returns wanes with time to insignificance, while that of causality waxes to dominance. These contrasting behaviours inevitably lead to the prediction of the existence of portfolio take-off. At some point in time, causality's contribution to the return starts to pull away from that of randomness, growing the return over time without limit. Empirically, the take-off time is about 15 years. With the establishment of the take-off point, our theory identifies two stages in the lifetime of a portfolio: taxi-time on the runway for about 15 years and take-off to unlimited growth over time. The existence of portfolio take-off has important implications for us investors. First, it gives an overall direction to our investing activities - achieving take-off. Second, it provides overall guidance in managing our portfolios - for take-off. Third, it relieves our minds of doubts about the possibility of take-off - psychologically, the impossibility barrier falls off. What does this mean for us investors? The achievement of Warren Buffett without any doubt is extraordinary. Our theory does not take any lustre away from the spectacular way he achieved it. Buffett had no negative years, from 1965 to 1997. His portfolio literally took-off right from the start. What our theory asserts is that the attainment of portfolio take-off to unlimited growth is a natural, as natural as growing a tree in our garden. Anyone with an average IQ and above average EQ (emotional intelligence) can attain it. Unlike Buffett, we may stumble along the way. The time to attain it may be longer. Nevertheless, attainment it is just the same - if we pass the take-off point. To those of us who are not comfortable picking stocks or managing a portfolio, investing in index fund is the way to go. The example we used in the book is the S&P 500 index. It attained take-off after 15 years, starting in 1928, around the Great Depression. We will do much better than the S&P 500 index by choosing a value-weighted index fund. Greenblatt has shown the value-weighted funds perform yearly 5% above the performance of market-capitalization weighted index funds. If we stay invested in a value-weighted index fund, we will likely attain take-off earlier than 15 years. To those of us who are comfortable picking stocks or managing a portfolio, there are many paths to attain portfolio take-off. The multiplicity of paths can be a source of doubt as to the best or the shortest. Each of us has to resolve this issue. We part with the image we started with. Investing is like piloting a plane. Our portfolio takes-off after taxi time on the runway for about 15 years. Once airborne, it will continue to climb to the sky-is-the-limit over time.
