The Magical Elven Box
Making a living in the stock market
This is the second article of a series. The previous article is “How Many Golden Eggs Would You Pay for the Golden Goose?”.
What I mean about making a living in the stock marketing is making money enough for your financial independence, at least. I don’t mean working 8 hours per day connected to the market. In fact, you will have a lot of spare time. And when you have time and are not in need of money, you can work in the activities that you are passionate for, in the pleasant conditions that you choose.
Ideally, working in the stock market should be your secondary work. And your main work should NOT be sitting in front a computer. But something that keeps you moving, handling objects, plants or animals and interacting with people. Stock market is a passion but need not be the only one.
It is good for your health and happiness. And also for your investments, because you come not stressed, with a fresh mind, to operate in the market.
Maybe this was the reason, after I started making money in the stock market, I made money nowhere else: making money in the other business was not a priority.
One of the things that I most like in the stock market is that losing money there is extremely easy, compared to losing money in other businesses.
We start a business to win money, not to lose money. At least this is our conscious desire.
But if I am going to fail, I prefer to fail in a business that is very easy to open, very easy to manage and very easy to close. You can do everything from home, dressing underwear, through the internet. You don’t have a boss. You don’t need partners. You don’t need employees. You don’t have customers to attend. You don’t have and don’t need providers. You will not be prosecuted. The broker is the only provider you need, but things are so automated that you don’t feel you have a provider. There is no bureaucracy, no invoices to write, the broker provides the contract notes, the brokerage statement. You don’t need a license for open the business. You even may not “go to work” when you are not in the mood. If you want to give up, you can sell everything in 15 minutes and goodbye.
Compare that ease against all the trouble you have, all details to care, opening and running a restaurant just for money (no passion). If you want to give up, you still have to go there every day for months or years till a buyer appears; hating wasting your time every day in a work that failed and is not your passion, just because if you keep it open, maybe you can sell it and recover part of the investment.
One of the things that I most like in the stock market is that making money there is extremely easy, compared to making money in other businesses.
The magical elven box
If you haven’t read the previous article, you must do it now.
You are young. You grab $10,000 for investing/trading with stocks. Grabbing the money was not easy, but you did it. You do everything well and may double your capital each year. Will you have $10,000,000 after ten years, like we did the math in the previous article?
The math was OK. And the market offers opportunities for doubling the capital each year. Although it does not happen on a regular basis. In some years you “lose” (not really a loss if you don’t sell; it is a subject for other article). Some years your profit rate is very low. And some years you have a profit of 300% or 400% (multiplying the capital by 5).
You will have much less than $10,000,000 after ten years because you do everything right, as you should do! You read this right.
You are doing everything right and your initial $10,000 became $30,000. What a wise person would say? “Maybe I was lucky. Will I win or lose in the next turn? I would not like to lose my initial capital. $10,000 makes difference to me.”. Therefore, you withdraw $15,000 from the brokerage account, leaving $15,000 for investment/trading.
When your capital in the brokerage account becomes $60,000 you withdraw $20.000. And so on. And you are right.
Only losers play all or nothing. Winners focus on surviving.
There is another factor for your capital not be multiplied 10,000 times in ten years. You are not a machine. You are not a greedy person. When your income is more than enough, you start to relax a bit. And start to using defensive strategies to protect your accumulated capital. You reached your goal. Congratulations!
The goal is NOT becoming rich. The goal is easily reaching a comfortable financial situation. Becoming rich is an undesirable collateral effect that happens with time.
And about the AVERAGE profit rate of 100% per year?
It is possible but don’t set it as a goal.
AVERAGE annual profit of 50% is good enough. If it is lower than 25% on normal years, it means you are not very focused (no problem) or you are doing something wrong.
Adjusting the profit rate of the magical elven box to 50%:
- start: $ 1.00
- end of first year: $1.00 * 1.5 = $1.50
- end of second year: $1.5 * 1.5 = $2.25
- end of third year: $2.25 * 1.5 = $3.375
- end of fourth year: $3.375 * 1.5 = $5.0625
- end of fifth year: $5.0625 * 1.5 = $7.59375
- end of sixth year: $7.59375 * 1.5 = $11.390625
- end of seventh year: $11.390625 * 1.5 = $17.0859375
9. end of eighth year: $17.0859375 * 1.5 = $25.62890625
10. end of ninth year: $25.62890625 * 1.5 = $38.443359375
11. end of tenth year: $38.443359375 * 1.5 = $57.665039062
The math tells us that who invests $10,000 at the profit rate of 50% per year, after ten years will have $576,650. Not bad! Not fantastic as $10,000,000 , but not bad at all!
Imagine you have a farm and 10 years after you will have 57 farms.
By the way, a profit rate of 50% per year means less than 3.5% per month.
Your withdrawals will have smaller impact because there is less profit to take and because the evolution is slow (compared when doubling the capital each year); so you don’t feel that you are abusing the luck if you always reinvest the profits.
To be continued
The next article is The Cat in the Kitchen.