In my book The Confident Investor I detail a possible trading example using 3 different methodologies.
- Traditional "Buy and Hold" strategy
- Traditional "Even incremental investment over time"
- My GOPM strategy - "Grow on Other People's Money"
I chose the example around IBM [stckqut]ibm[/stckqut] because it is such a well-known brand even if it may not be the best of companies in which to invest. I felt that it was important to show that my technique works with most fair companies. It works even better on a good company.
I also specifically chose 2007 and 2008 as my example time period. I chose this example since many people still do not invest in stocks due to the plunge that happened in November 2008. This plunge wiped out considerable value in the stock market and persuaded too many people that investing in stocks is foolish. My example shows that if you stick with the "traditional" methods of incremental investing and buy-and-hold then you will be very susceptible to these market corrections. GOPM tends to reduce this exposure and even take advantage of it.
The tag line of this site and of my book is "Learn How to Invest With Confidence in a Turbulent Market" and there were few times in the last 15 years when the market was more turbulent that 2007 and 2008. So I chose the worst of times to explain how my GOPM method can make it the best of times.
In the first scenario, an investor buys IBM stock and sits on it. A traditional buy-and-hold technique. He loses money in the crash and like too many people gives up on the stock market as a method to provide for his retirement.
In the second scenario, an investor invests $2,000 in IBM every 3 months. He ultimately takes a bath in the fall of 2008.
In the third scenario, an investor has read my book and uses GOPM - Grow on Other People's Money. Obviously, the crash of 2008 affects him but he loses none of his capital and has acquired 39 shares of stock in IBM for only $7.22 per share or about 10% of the value of the stock at the time (after the crash, IBM stock had dropped to about $75).
I used a slight variation of my traditional technique for simplicity. Typically, I suggest that an investor invest the same dollar amount using GOPM techniques but in this case I varied the dollar and bought 100 shares of stock in each transaction. Had I used the same dollar amount, the return would have been slightly higher but the math would have been a bit more complicated to explain in this very first example of the technique.
If you are concerned about a major correction in the stock market wiping out your net worth, you really should read my book. You can read a sample of the book here and it includes Chapter 4 which is the chapter containing this IBM explanation.
If you are a registered reader of my book then you will be able to see the table below that shows the time of each GOPM trade and the profit or loss from that trade. It is FREE to register for anyone that has purchased my book.