A stock market ride

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If you’ve found this, and are interested in the stock market, you have found what may prove to be an interesting ride.  I plan to create an asset management company, take it to initial public offering (IPO) within 7 years, and chronicle it all here.

I have discovered and researched a compounding effect created from matching common stocks in portfolios, and trading between them, in a specific way.   Where typical historical stock market returns have been 8-10% per year from economic growth, inflation, and dividends, the compounding that my model produces is typically in the order of 25%, without using leverage (borrowed money).  

This is not to say that you will make that kind of return in any given year, every year.  Some years returns will be much higher and in others negative (that bear market thing) – but over time, in the order of 15-20 years, the average annual compound rate of return will settle toward that average. 

The typical mutual funds that most people invest in typically don’t even do as well as the market, so a 20+% return, if implemented as a business managing investments, offers a huge competitive advantage.

A no-brainer, right?  Well no.  At first no-one will believe us because they don’t know who we are and it will seem too good to be true.  Most, probably all of them, will be singing “See ya later, Allocator” as we’re going out the door.  Secondly, the attention span of most investors is pretty short.  Not many will be interested in waiting for the 3-5 years for the consistent outperformance to emerge, let alone 15-20 years for anything.  Except for a few, and we will have to (a) find them, and (b) convince them.  That’s the business part.   One marketing ace-in-the-hole we hold is that the method will work for massive portfolios as well as small ones without hindering performance.  Liquidity and agility is a big problem for big portfolios because large orders will move the market against you.  That part is solved, adding another important competitive edge.

We only need ONE big client to get things rolling.  That could take 2-3 years.  Meanwhile, the company will manage my personal assets (as Client #1), its own internal (house) account, and an investment club of the initial founding investors – all for the purpose of creating a track record.  I already have some actual performance numbers for one of my personal accounts – up 56% in two years vs 23% of the S&P500, and for a model $1M paper account I’ve been tracking with real prices that is up 50% over the same period.  (This looks suspiciously like 25% per year, but in this short time frame that is simply co-incidence, and reflects more my initial brilliant stock picking than the compounding. )

The business model is simple and low-cost.  After initial set-up, the investment part of the business will run mostly on auto-pilot, with low operational costs.  The major business effort and focus will be in marketing, as the degree of financial success for the management company is directly proportional to the amount of assets (pile of money) under management.

Many interesting things are going to be happening in the stock market in that time, and I will also be commenting on those in general.  I will direct stakeholders to this weblog to get a sense of who I am, and to provide updates on the business progress and on the tracking accounts.

As of today, the company is not yet formed, but the powerpoint presentation to founding investors (those investing in the management company itself) is essentially complete.  The intent is to raise USD $100,000 as capital in the management company, offer up my personal retirement portfolios (~USD $150,000) for management (for which I was using the method for anyway), and form an investment club of at least $30,000 initially.  Once the other founding investors are secured, we begin the task of finding our first large institutional or high-net-worth investor.

Cheers and Merry Christmas

 Allocator

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