Earning money with stocks: Understanding the securities strategy


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Text comes from: Endlich mit Aktien Geld verdienen: Die Strategien und Techniken, die Erfolg versprechen (2012) by Max Otte, published by Münchener Verlagsgruppe (MVG), Reprints by friendly permission of the publisher.
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You can make money with stocks. Lot of money. Probably more than you think. But also different than you think. Some basics.

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Max Otte is a financial and economic analyst and founder of the Institute for Asset Development (IFVE).

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The pension is not certain!

State pensions are increasingly being eroded. The value of money - and thus the value of life insurance, savings and pension claims - is also at risk. The massive money creation by central banks after the financial crisis has created a flood of money that is creating increasing inflationary pressure. Since the Bundesbank was forced against the will of its then president, Axel Weber, to buy government bonds from the indebted Southerners, it has no longer been independent and can no longer fulfill its actual task, namely to secure the monetary value. Sooner or later, account balances, life insurance and pension entitlements will no longer be worth what was promised.

For every 30.000 euros of ongoing private pension per year, you need approximately one million euros in assets if you do not want to touch your capital stock. I will show you how to achieve your financial and savings goals and how to double your capital every seven years with an average return of 10%. The good thing about it: my system is pretty simple. And: my system is logically structured. With discipline you can learn it and apply my methods yourself. This is not something for everyone, because it is important to sit and take advantage of the fluctuations in mood on the stock exchanges. But even if you want to invest in an equity fund, it is important to know the right principles of investment in order to choose the right fund.

You only get high returns through productive assets

You can only achieve returns of 8 to 10% per year with real assets, with productive assets with which you participate in the growth of the economy. Claims on money - be it bonds, time deposits or life insurance - will not come close to generating these returns. Shares are productive assets. You certify ownership of one Company and its earnings. The large fortunes in Germany were saved primarily from company shares, shares and land ownership over the Second World War and are often still intact today, for example the fortunes of the Quandt family (BMW, Altana), the Haniels (Celesio, formerly Gehe, Metro, Takkt), the Henkels or the heirs of Fresenius, Wella, Tchibo, Kaiser's. So it can't be wrong if you get on the same boat.

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How secure a share is in the long term depends on the security of the company. Therefore, an important piece of advice right from the start: rely on tried-and-tested companies such as those mentioned above, not on current headline-grabbing ideas such as "raw materials", "China" or "renewable energies". Such industries have usually run hot. The financial industry is interested in the fact that such hypes, i.e. phases of euphoria, arise. Private investors mostly lose money overall.

Don't lose money

The stock exchange rule number one is therefore: "Don't lose any money." In the long run no money to lose create with proven investments such as CocaCola, Beiersdorf, Henkel, BMW or Daimler. Behind these companies are company histories that go back many decades and sometimes significantly more than a century. Ten thousand people work there for you, the shareholder. But Make money is something else. Because even with all these companies you would have made little or no money in the course of the 2000s. So it really depends when You buy such safe companies and when you sell them if necessary.

When it comes to building up long-term assets, stocks are at the forefront. Of course, this does not happen on its own, but requires one thing above all: patience - because time is your strongest ally when it comes to investing capital. But there are also a few helpful tricks with which you can successfully invest on the stock exchanges in the long term. Let yourself be surprised how you can increase your capital enormously with small but regular amounts of money in a savings plan. Use the compound interest effect, which is explained in this capital, as well as the so-called cost average effect, with which you can automatically increase the success of your investments when investing. An overview of the different asset classes shows you what average returns you can expect and what advantages and disadvantages these classes have.

You can make money with stocks - lots of money!

I have been dealing with equity investments for a long time - in the 1980s playfully and not always very successfully as a student, then rather not as a doctoral student and young management consultant and increasingly professional from the mid-1990s. It took a decade for my system to really suit me and be mature. I want to shorten this path for you. But I can't completely spare him. The great André Kostolany spoke of the fact that the money earned on the stock exchange was nothing other than compensation for pain and suffering: "Pain comes first, then money."

Not all of you will be able to use the system and keep it up. There are people who are not born to invest in the capital markets. Some lack the intellectual, some the character requirements. Some brains, education and interest in the economy (if less than you might think), hard work and above all serenity, self-confidence and calmness are necessary. But if you have these requirements, there is no reason why you should be satisfied with less than 8 to 10% in the long term with very limited workload.

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Asset growth through equity investments: what is at stake

I admit that I am a stock fan. Most of my capital is invested in stocks. Shares in good companies are productive and tangible with inflation protection. You can check for yourself whether my method is successful or not - using a fund that is managed according to my method.

The PI Global Value (WKN: A0NE9G) only invests in bonds or time deposits when there are no more suitable stocks. The fund is therefore a global mixed fund with a focus on Germany, Austria, Switzerland, Europe and North America, with a tendency to equities. Since it was launched on March 15, 2008 until April 2, 2012, the PI Global Value Fund has achieved a return of 51% almost exclusively on equities. Despite the biggest financial crisis since 1929 and the nuclear disaster in Japan, that is 10,8% a year. Incidentally, the DAX rose by 8,7% in the same period - this also corresponds to an annual return of 2,2% despite the financial crisis. Even with stocks, you would have easily hit the time deposit if the roller coaster ride had put a lot of stress on you.

The PI Global Value Fund is now available from a number of German banks. He follows the basic philosophy of ValueInvesting (value-oriented investing): To value the shares, a thorough fundamental analysis is carried out and thus it is checked whether the analyzed company is undervalued or overvalued on the stock exchange. Warren Buffett, the third richest person in the world, has acted according to these principles and has achieved an average return of over 22% annually since imposing his fund.

Buy shares, fall asleep?

In our growth portfolio, we have achieved a return of 2002% with clear and transparent strategies since 202, which is 13,1% per year. During the same period, the DAX achieved a return of 90,7%, that is 7,4% per year. Even in turbulent times, good returns are possible on the stock exchange.

The stock exchange legend André Kostolany advised to buy standard values, to go to the pharmacy, to get sleeping pills and to wake up after five or six years of deep sleep and to enjoy a nice profit. He was concerned with psychological advice to protect himself from wrong behavior. In this respect, it should not be understood as a simple buy and hold strategy. Ultimately, it's not that bad. Even if you only use this "sleeping pill strategy", you can achieve impressive results. From 1948 to 2010, the DAX achieved an average return of 11,6%. The Euro Stoxx50 achieved an average return of 1987% between 2010 and 9,2 - despite the financial crisis! You can therefore achieve long-term returns of 8 to 10% with normal stocks if you simply buy standard stocks and leave them there. Unfortunately, it will be a little less for equity funds, because most fund managers will not be able to outperform their benchmark in the long term. More on that later.

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How to double your wealth

With normal achievable stock returns of 8 to 10% value growth per year, you double your assets every seven to nine years. Even when inflation is factored in, very decent returns remain: Jeremy Siegel from the University of Pennsylvania has examined equity returns over the past two centuries and came to 6,6 to 7% in real terms - after inflation has been deducted. Before inflation it would have been about 10%.

Nowadays you can easily set up fund savings plans at many online banks. In some cases, amounts starting at 25 euros per month are possible, which can be saved in funds easily and without great effort. It is not a secret recipe, but it requires discipline, diligence and the necessary character traits. I hope you will dare to invest directly in some stocks. However, if you decide against this for any reason, you can invest in a well-managed, value-oriented equity fund via a stock fund savings plan.

Invest regularly with a fund savings plan

With an equity fund savings plan, you regularly invest an equal amount in an equity fund, i.e. every month or once a quarter. Most banks and investment companies offer savings plans from a monthly amount of 50 euros. The money flows into a fund and you receive one or more shares for your regular investment in accordance with the current fund price. An equity fund contains several shares. These are compiled by a fund manager. The fund manager analyzes stocks and buys or sells them based on his analyzes, ideas and valuations; he is flexible in switching his equity portfolio. The fund can be organized according to various “philosophies” and orientations of the manager. The fund manager aims to increase the value of the fund by selecting stocks that may rise in price. If this succeeds, the value of the fund units that you regularly purchase through the savings plan will increase.

In the first years since the PI Global Value Fund was launched, many investors, particularly in Germany, faced the difficulty of getting the fund into a custody account with banks. Banks often answered customer inquiries with a shake of the head and the reason: "Sorry, the fund has no marketing authorization in Germany."

Invest in funds

A lot has happened in terms of the availability of the PI Global Value Fund since this argument ceased to exist with the approval of distribution in Germany, Austria and Switzerland. The fund can now be subscribed to most banks in Germany without any problems, and the direct banks have now also followed suit and allow investors to invest in the fund for very small assets.

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INGDiBa offers the option of a one-off system from a volume of 1.000 euros, with Comdirect this is even possible from a total of 500 euros. Cortal Consors goes one step further and enables their custodian customers to set up a savings plan for as little as 25 euros per month. The exact settings of this savings plan are very flexible. Not only is the amount to be saved freely selectable from the very low minimum amount, but also quarterly or half-yearly execution is possible.

The Internet portal Optimal Banking (www.optimalbanking.de), which specializes in the comparison of direct banks, has taken a close look at all three banks and has provided very detailed and easy-to-understand instructions for setting up one-time investments at Comdirect and setting up the savings plan at Cortal Consors provided.

Get rich in planning: Build up a fortune with small amounts

Using two examples, I would like to show you specifically which capital generation with relatively small monthly savings amounts is possible over the years. For almost everyone - as long as they are disciplined when it comes to spending - it should be possible to save 50 or 100 euros per month for wealth accumulation. In our first example, we are assuming a € 50 savings plan and return assumptions of 10% and 13% respectively, which is the return our funds have generated over the past three years since its re-launch.

Term (years) 10% 13%
5 € 3.861 € 4.161
10 € 10.080 € 11.830
15 € 20.096 € 25.958
20 € 36.226 € 51.988
25 € 62.204 € 99.946
30 € 104.042 € 188.307
40 € 279.939 € 651.051

This table shows the development of assets at 50EuroSparplan in the month with the PI Global Value Fund over the years of the term with an assumed return of 10% and 13%.

This example shows what wealth growth is already possible with small amounts that are put on the high edge every month. The compound interest effect is clearly noticeable: after 40 years, with 13% average return and a total payment of 24.000 euros, assets of over half a million euros would have accumulated in the end. With a 10% return and a term of 40 years, it would still be just under 280.000 euros, which would represent a solid starting point for a handsome family home.

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Term (years) 10% 13%
5 € 7.722 € 8.323
10 € 20.160 € 23.660
15 € 40.192 € 51.916
20 € 72.452 € 103.976
25 € 124.409 € 199.893
30 € 208.084 € 376.614
40 € 559.879 € 1.302.103

This table shows the development of assets at 100EuroSparplan in the month with the PI Global Value Fund over the years of the term with an assumed return of 10% and 13%.

With a monthly saving of 100 euros and an assumed return of 13% and a 40-year term, you will have total assets of an incredible 1,3 million euros. But doesn't 13% return sound utopian? Again, I have to counter that the PI Global Value Funds, for example, achieved a return of 15% between its launch on March 2008, 15 and March 2011, 13,7 despite the financial crisis.

The compound interest effect as a yield driver

The table shows the steps in which this 1,3 million euro fortune has accumulated over the years. Nevertheless, it is almost unbelievable that you can build up such a large capital out of a monthly savings rate of 100 euros. The secret behind it was already known in ancient India. According to legend, a king called Shihram ruled there in the 3rd or 4th century, who by toughness

Get rich in planning - build up a fortune with small sums and bring nepotism over his country (you see, little has changed in the past centuries). The scholar Sissa ibn Dahir is said to have invented an early form of chess to encourage the arrogant shihram to think, but without incurring his anger: after all, there the king alone can do nothing against his enemies, i.e. without the other figures, and is back Defeat damn.

Wisdom cannot be bought

So Sissa gave his ruler the game he had invented on the grounds that the king could use it to fight his boredom, but at the same time hoped that the recipient of the game would recognize how important the subjects are in a state. Legend has it that Shihram was so enthusiastic about the game of chess that he gave the order to have it spread throughout his realm. So the scholar had reached his goal, because the king recognized the wisdom of the game and asked his inventor to tell him a wish that he would fulfill it.

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Sissa expressed the wish to be rewarded with grains of rice. The king should put a grain of rice on the first field, two grains on the second field, four grains on the third and so on. Shihram was very surprised by this seemingly modest request and immediately gave the order to get the necessary rice grains. A short time later he asked whether Sissa had already received his wages. His officials then told him that they had never been able to get so much rice from across the empire. The scholar had thus given his king another lesson: wisdom cannot be bought with any wealth in the world.

This is how the interest rate has an impact

Because in total the king should have rewarded the scholar with around 18 trillion grains of rice (a trillion is a one with 18 zeros). To illustrate this huge number a little, let's assume that a grain of rice weighs 0,03 grams. After the 17th field, the weight of all rice grains is just under 2 kilograms, after the 26th field already one ton. The total weight of rice after the 64th pitch is an incredible 5.000 trillion tons. This figure is still not very clear, so let's make another comparison: According to the World Food Organization FAO, worldwide demand for rice was around 2010 million tons in 450. With the amount of rice that the Indian scholar wanted from his king, the world population could be fed with rice for 11.000 years by today's standards. Mind you, it all started with a single grain of rice on the first checkerboard field!

A nice legend, but you might be wondering what all this has to do with investing and the compound interest effect. Well, the scholar Sissa demanded twice the amount of rice grains for each additional field as on the previous one. The “interest” per field was 100%. Such an interest rate would rightly be called usury today, but the checkerboard effect and the grain of rice can explain the compound interest effect well. Suppose you get "only" 10% more per playing field, ie per year for your capital, which was 1.000 euros at the beginning (ie on the first field). In the second year, your capital grows by 10% to 1.100 euros. In the third year you will receive a further 10% on your capital - but now not on your 1.000 euros of starting capital, but on 1.100 euros, because the status from the second year is used as a basis. That would be 1.210 euros. And so it goes on; In the tenth year, your start-up capital increased from 1.000 euros to almost 2.600 euros. Although you "only" received 10% interest per year, your initial capital increased by 160%, in fact by 16% per year. The reason: you not only received 10% per annum on your invested capital, but also on the interest paid on it. Hence the term "compound interest".


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