The Magic Formula

It’s hard to articulate the appeal of investing in the stock market. The closest I can come to describing what is so alluring about the whole thing is to say it is MAGIC. Other magical things are watching a caterpillar hatch out of a chrysalis into a butterfly, or creating a piece of theatre or art from limited raw materials. Any sort of transformation is magical, and there is a formula all investors use as a guidepost for their investing. The formula has three basic inputs that result in a fourth value. The fourth value is the transformation, the butterfly, the painting, the final product of the creative magic at the end of the investment cycle.

There is nothing inherently beautiful about money (unless you are a rare coin collector, maybe), or greed, or paying bills, or “rich people,” who IMHO are some of the most bland people around. But there is something beautiful about being part of a transformative process, as anyone who has helped create a piece of theatre knows on opening night, or anyone who has watched a little sprout grow into a plant and then a tree, or who has seen a child take their first steps with prosthetic legs. The magic of transformation that makes us gasp at the new entity is available, believe it or not, with this simple formula. (Trigger warning: math ahead!) It is called an investment calculator, and it contains three main components (the inputs):

the starting amount,

the rate of return,

and the number of years invested.

The output, which it calculates for you, is the amount of money at the end of the time period. Simple, basic, boring. Right? But, if you play around with the inputs, you’ll start to see some magic. Before you jump online and find one of the many available calculator tools and start feeding different numbers in the spaces, be prepared for a few (less relevant) inputs they may ask for. Some of them want to know about “additional contributions” and whether they are added monthly, weekly, or yearly. You can put zero in this box and still see magic. They also might ask if the money is compounded quarterly, monthly, annually, etc. Again, not particularly relevant to the overall magic. Pick annually from the pull-down menu for our purposes.

Now it’s time to start having fun.

Starting amount: How much money are we hypothetically starting with? I like the starting amount of $1000. For the sake of playing around, pick an amount you like. The starting amount is the amount of money you will be putting into the stock market, either hypothetically or IRL, for our purposes.

Rate of return: This is also called the interest rate, discount rate, etc. It is expressed in a percentage. In real life, in the stock market, it is always a guess, because the market doesn’t tell you what the rate of growth will be. This is why the stock market is so scary and fun. A stock might go up 2% in a year. Another might go down 5%. Another grows at the rate of 10,000%! We have no idea what’s going to happen. Everyone is just guessing and anyone who acts overly confident about this one is pretending.

Note: This is different than a bank-issued CD or a savings account that is FDIC insured and promises a certain annual return. Generally, they promise a very small return (like .04%) and there is NOTHING magical about small guaranteed returns. You won’t see a transformation happen in your lifetime or your grandkids’. (If you are already rich and extremely cautious, you may feel a sense of security that you didn’t lose any money by putting your money in these holding zones. But they aren’t investments so much as stagnant lockboxes which take money and let it atrophy until it is all spent.) So if we have no idea what the rate of return will be, how do we pick one to play with? Well, the “Dow Jones Industrial Average”, over the past 20 years, has had an average rate of about 7%. So you may want to start with 7%. I like 10%, because if you are picking your own stocks, you can probably do better than the Dow, due to the fact that you are picking companies you know something about and believe in. In fact, I bet you will pick some companies that go up 25% in the first year, and others that go down 2% — but we will get into the nitty-gritty details of that later. For now just play with a percentage return that you’d like to imagine getting! 10% is a respectable number.

Number of Years: How long are you willing to wait to get really wealthy? If you are impatient, this isn’t the game for you, because wealth needs time to grow. However, once it gets to a critical point, it grows like mad. You know that song inchworm? 2 and 2 are 4, 4 and 4 are 8, 8 and 8 are 16, 16 and 16 are 32…etc? It’s like that. You start small, but when you are compounding, or doubling, your money, at regular intervals, it starts to snowball at a certain point. Warren Buffett isn’t expecting to “make” a certain amount of money every year, he’s expecting to DOUBLE his money in a certain number of years. And you should too! Try different inputs here. Put a small number, like 10 years, into the calculator. Next put a medium sized one, like 50 years. Finally, put something like 100 years in there. You won’t even be alive! Who cares?! Olmstead wasn’t alive by the time the trees he had planted in New York City grew to their full glory, but he got to watch it start happening, and now we all get to enjoy the magic of Central Park.

Now you are ready to play with the investment calculator. There are free apps for this you can download onto your homescreen. (Mine is called JMS Investment Calculator, and it’s orange.) Here’s an online one: http://www.calculator.net/investment-calculator.html

Come back when you have the three outputs from 10, 50 and 100 years of investing 1000 at 10%.

After 10 years: $2600

After 50 years: $117,000

After 100 years: $13,800,000!! That’s 14 million y’all.

Welcome back! Are you energized by the magic? Isn’t it crazy how much wealth you can build by just putting money in the market and letting it grow?! The first 40 years you got a respectable increase in money, right? But how about that second 50 years? How did that happen? You just made your grandkids or favorite nieces millionaires several times over and you did nothing more than make some smart investments and then go about your life for a hundred years! Okay, so I guess you died at some point. Sorry about that. So did I. But, remarkably, your money not only didn’t die, but some major magic happened because now it is on steroids. Hopefully your grandkid/niece appreciates how this happened and can keep the magic alive, and hopefully you have raised their parents with a humanitarian and responsible ethos, or written letters of guidance for your nieces to consult, because your future heirs will need to think responsibly about how to use their great financial influence.

OK, so maybe you are not impressed yet. Maybe you are a get-rich-quicker type or don’t care what happens after you are dead. Valid. When you read my story you will see that one of my stocks went up 10,000 percent in a few years. Lets say it grew at a rate of 100 percent yearly for the sake of the calculator. Watch what happens in ten years when you enter 100 for your rate, (starting with a thousand bucks). Yeah. You’re a millionaire. This demonstrates the unlimited upside of investing in the stock market. What’s the downside? Losing a thousand bucks. Unlike gambling, you can double, triple, quintuple your money in the market while still only risking your initial investment.

Why do I sound like an infomercial when I’m not selling you anything. Because this stuff is exciting. It means you can start creating wealth right now. All by yourself. All you need is a computer, some confidence (here, have some of mine), and an initial investment that you are comfortable kissing goodbye for a really long time. You will get to watch it and take care of it forever, but you can’t see it as “money” anymore. You treat it differently. More on that later.

Muah.

SG

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