RE: [CANSLIM] Reasonable Goal?

From: "Manny Llaguno" <llaguno@rogers.com>
Subject: RE: [CANSLIM] Reasonable Goal?
Date: Mon, 26 May 2003 03:25:46 -0400
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interesting scenario ...

Joe Investor claims that he made 100% returns *on average* over the last 2
years. Year one he made 200%, year 2 he made -100%. The "average" return was
[200% + (-100%)]/2 = 100%. *However* he actually has NO MONEY LEFT!!!! -100%
in year 2 means he *lost all of his capital*! So... you can't assume an
*average* of 40% and make your numbers work as you have outlined them.

- -----Original Message-----
From: owner-canslim@lists.xmission.com
[mailto:owner-canslim@lists.xmission.com]On Behalf Of Katherine Malm
Sent: Sunday, May 25, 2003 8:15 PM
To: canslim@lists.xmission.com
Subject: RE: [CANSLIM] Reasonable Goal?



Note to the list: This thread actually started offlist, but as Tomas has
moved it on-list, to get the gist of the discussion, you'll need to read
back to my original response....
===

Hi Tomas,

I haven't looked that closely at your numbers, but I want to be sure you've
included a couple of things in the calculations:

(1) When you took out the tax each year, were you investing the *after tax
amount* into the next year as your base capital? Just want to be sure, as
that will make a difference in your final calculations. The other assumption
is that you will always be 25% margined. When the market is weak, you're not
going to want to do that. The general rule of thumb is that you don't want
to begin margining until your portfolio is fully invested and each and every
position is up at least 20%. In very strong markets, that's do-able, but
you're assuming that 100% of the time over the last 8 years that you are
going to be in that situation.

(2) The returns you're calculating are indeed assuming 40% *each and every*
year, as you are rolling the end of year figure into the next year and then
compounding it at a rate of 40%. That's hugely different than an *average*
of 40%. Let me give you a silly example just to make my point.

Joe Investor claims that he made 100% returns *on average* over the last 2
years. Year one he made 200%, year 2 he made -100%. The "average" return was
[200% + (-100%)]/2 = 100%. *However* he actually has NO MONEY LEFT!!!! -100%
in year 2 means he *lost all of his capital*! So... you can't assume an
*average* of 40% and make your numbers work as you have outlined them.

Your model will become considerably more complex if you try and estimate
returns for one year vs. another that *average* to 40%. Bottom line is that
you have to be able to make that kind of return consistently, each and every
year without fail to make the final figure. That means that as a brand new
CANSLIM investor, you have to do everything right now and always. We have a
saying we use often in CANSLIM-speak, that is, we pay a tuition to Mr.
Market for the mistakes we make along the path to becoming excellent
investors (i.e, you're going to make some big mistakes that will cost you
some bucks as you learn to use the CANSLIM methodology.)

I'm a huge believer in setting goals, writing a plan to achieve them, and
then measuring and assessing my performance over time. That's how I get
better each and every year. Each year my focus is a bit different, based on
the mistakes that I made the previous year and on the areas of investing for
which I feel less comfortable. It's this process that makes us stronger and
better as CANSLIM investors. However, I'm also a big believer in setting
tough, but realistic goals. The process that you are going through is the
first step and for the most part, is the easiest. The tough part is to break
it down and come up with a to-do list of what you need to do to make the
40%/year.

Katherine

- -----Original Message-----
From: owner-canslim@lists.xmission.com
[mailto:owner-canslim@lists.xmission.com]On Behalf Of Tomas
Sent: Sunday, May 25, 2003 3:58 PM
To: canslim canslim
Subject: RE: [CANSLIM] Reasonable Goal?


Katherine,

As alway, your answer is well thought out, and
comprehensive.
I appreciate the time you spent to answer my question.

Yes, you can break the question into two parts.
But, I would like to make a little change.

1) Is it reasonable to assume that, using a CANSLIM
approach,
that I can make 40-46% per year, AVERAGED OUT for the
next 10 years?

In other words, I understand that for bear markets, it
would
be hard to make 40-46% returns.  However, maybe you
can make
more than 40% in a bull market to compensate for the
bear market.
Like you said, it might be easy to make triple digit
return in
the last bull market.  I hope these kind of bull
markets (though
I don't see the last bull market happening that ofen)
will provide
a better chance of hitting the 40-46% average return
for 10 years
or so.

I am a new CS'er.  I just started seriously using CS a
few months ago.
So, I do not have previous year performance numbers to
base off.  Maybe
that is where the optimistic 40-46% return goal comes
in :).
However, I truly believe that if there is a will,
there is a way.

This is the game plan:
- -$10,000 starting funds
- -add $10,000 per year at the beginning of each year

Below is the calculation(Hope the table comes out OK).

The average return(ROR) is calculated for
40%, tax rate is 28% (even though I think it might
increase later),
and average margin used will be 25%.  For the first
two years,
I did not put margin in.


ROR  Tax Rate   Margin
40%  28%        25%

Age Year  Principal   Without Tax    With Tax
With Tax and Margin

29  2003  $10,000.00  $14,000.00     $12,880.00
$12,880.00   (no margin)
30  2004  $10,000.00  $33,600.00     $29,469.44
$29,469.44   (no margin)
31  2005  $10,000.00  $61,040.00     $50,836.64
$53,678.44
32  2006  $10,000.00  $99,456.00     $78,357.59
$86,602.68
33  2007  $10,000.00  $153,238.40    $113,804.58
$131,379.64
34  2008  $10,000.00  $228,533.76    $159,460.29
$192,276.31
35  2009  $10,000.00  $333,947.26    $218,264.86
$275,095.78
36  2010  $10,000.00  $481,526.17    $294,005.14
$387,730.26
37  2011  $10,000.00  $688,136.64    $391,558.62
$540,913.16
38  2012  $10,000.00  $977,391.29    $517,207.50
$749,241.89
39  2013  $10,000.00  $1,382,347.81  $679,043.26
$1,032,568.98
40  2014  $10,000.00  $1,949,286.93  $887,487.72
$1,417,893.81
41  2015  $10,000.00  $2,743,001.71  $1,155,964.19
$1,941,935.58


Without Tax Column  = strictly 40% return with no tax
consideration
With Tax Column     = 40% return with tax at end of
year
With Tax and Margin = 40% return with tax using margin


The "without tax" column would be a tax deferred
account.
I am not sure if a 25% average margin usage is
sensible or not.
Thus, the $2M goal can be reached at 2015 (age 41).

I could add another 10K to the initial capital
investment to help
out with the ROR.  With initial $20k capital, the ROR
can be 37%
per year.

The whole idea of asking the question is the first
place is to
figure out what I need to do to get to that goal.  So,
if the
expected ROR is just plain silly/optimistic, I need to
figure
out what other things I need to do to get to that
goal.

With all this said and done, I would not mind if I
reach the
goal of $2M when I am 45.


Regards,
tomas

- -----Original Message-----
From: Katherine Malm [mailto:kmalm@earthlink.net]
Sent: Sunday, May 25, 2003 12:05 PM
To: Tomas
Subject: RE: [CANSLIM] Reasonable Goal?


Hi Tomas,

Overall, my impression is that you are really asking 2 different questions:
(1) Is it reasonable to assume that, using a CANSLIM approach, that I can
make 40-46% per year, *each and every year without fail* over the next 10
years?
(2) Is it a good idea to plan my future assuming that I'll have $2.5m in 10
years if I start with $10,000 now and add $10,000 per year?

While I know that you would rather someone say "yes" to both questions with
certainty, the truth of the matter is that one can't do so. If that's the
assumption, then what does that leave you with?

I think that there are few things that *can* be said with certainty:

(1) If you follow a disciplined approach to CANSLIM investing, you will
consistently outperform the market.

The real problem is that not all markets are conducive to a long-only
CANSLIM strategy with the same degree of risk. For example, in the late
90's, it was fairly easy to make triple digit returns, even without using
margin. That meant that a big bundle of money was available to reinvest in
the following year. Then, when the Bear hit, it became far more challenging
to make these kinds of returns without taking on additional risk and/or
adding complementary shorting strategies for the downswings. While the
market was plunging 60 or 70%, however, the *typical* (not exceptional)
long-only CANSLIM investor was more likely making 0-30%. Sure, that's
outperformance to the market, but it's not 40-46% per year, each and every
year. Those assumptions (and realities) make a huge difference in the
dollars compounded at the end of 10 years.

(2) You will have to pay taxes and if the dollars are in a taxable account;
the dollars available for investing in the following period after you've
paid taxes will be less.

Even though I know you'd like to keep the assumptions simple for the sake of
discussion, you just can't ignore this. If you don't have monies available
elsewhere to pay the tax man, then you can't roll entire positions and/or
profits into new positions in the following year. That can make an enormous
difference in the actual dollars you end up with at the end of 10 years. If
the dollars are in a tax deferred account, then all monies are available to
compound in the following year. Taxes, even though they have to be paid
eventually, don't impact the dollars that you can accumulate from one year
to the next. (And if you play on margin, which cannot be done in a tax
deferred account, then you're talking about an entirely different set of
assumptions.)


(3) The manner in which you add the $10000 per year, whether incrementally
month my month, quarter by quarter, or in one lump sum, will affect the
overall return.

If all your added dollars from one year to the next are not added in one
lump sum, then you do not have the luxury of investing them in positions so
that the $10K works for you all year. If you add, for example, month by
month, then the money will be more likely to sit idle for some time until
you close one position and then open a new position. If you instead choose
to put the money to work right away, then you are adding new positions with
very small dollar amounts, and the additional transaction costs will eat
into your returns. If you have a few super performers, you don't necessarily
have the luxury of adding to the position whenever you want, as the risk of
losing money increases if you add when the stock is not pulling out of a
fresh basing pattern. Those potential losses can impact your overall returns
dramatically.


So, that said, maybe it makes sense to get to the crux of the matter. Can
one theoretically achieve 40-46% returns per year with CANSLIM? Well, yes,
theoretically. In reality, you then have to ask yourself, "what returns have
I been able to achieve given the market backdrop and my current skill set?"
Say, for example, you've been able to make consistent 20% returns *each and
every year* for the last 5 years. You will have to *immediately* increase
your performance by a factor of 2+ to get to 40-46% per year. If you haven't
already been doing that, what specifically, will you have to do to make it
happen? What is the likelihood you will succeed? What is the "worst possible
scenario" if you don't? And remember, that even though with CANSLIM you will
always outperform the market, over long periods of time (and 10 years is a
long time), the average return on the market is somewhere in the vicinity of
8-11%. Here's one more statistic for you to show the power of a sideways
market such as about '62-'80 and '30-'45. If an investor had put $1000
dollars into the market in about 1962 and let it ride the ups and downs of
the market in an index fund, by 1980 (nearly *20* years), they would have
just about $1000 in the account. In inflation adjusted terms, that means
they *lost* their effective buying power. CANSLIM is certainly not a buy and
hold strategy, but if you are not an excellent investor and make too many
mistakes, then you will, at best, just end up making the market average.

Running the numbers:
- -$10,000 starting funds
- -add $10,000 per year at the beginning of each year
- -take no monies out of the funds for taxes
- -compound each and every year at 11% per year

The final sum at the end of 10 years is $214,008.51.

Katherine




- -----Original Message-----
From: Tomas [mailto:tomas986@yahoo.com]
Sent: Sunday, May 25, 2003 10:29 AM
To: kmalm@earthlink.net
Subject: Re: [CANSLIM] Reasonable Goal?


Katherine,

I was hoping you have some comments on this subject.
Do you think I am just too optimistic?  Or is this
goal within reach.


Thanks,
tomas

- --- Tomas <tomas986@yahoo.com> wrote:
> This question is for the senior CS'ers.  If an
> investor is 29 years old right now, and his goal is
> to
> make $2M by 40 to retire, is this a reasonable goal?
>
> The assumption is that he will start with $10K and
> add
> between $5-$10K capital every year.
>
> I understand that there are many factors like
> - how discipline you are
> - how diligence you are
> - how persistent you are
> - how you learn from your mistake and
>   do post analysis of your trades
> - and even how lucky you are.
>
> But assumption that the investor is decently good on
> those factors.  What is your opinion?
>
> Thanks,
> tomas



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