Get rich slowly

Arguably the simplest way to make handsome returns in the stock market is by riding a long-term bull market from its early stages through to its completion. Investors who can identify these secular trends early, and who have the patients to sit tight need only make a handful of investment decisions in their lifetime. Getting rich slowly may not be exciting but it’s certainly a very successful strategy.

Tides, Waves and Ripples

All markets are cyclical, meaning that they have a tendency to move either up or down for a period of time before reversing direction. Some cycles last only a few hours, some last days or months, and some last for many years, or even decades.

Dow Theory, the forerunner to modern day technical analysis, described the behaviour and movement of financial markets as being like Tides, Waves and Ripples. The Tide is the major long-term trend, also known as a secular Bull or Bear market. Waves are the intermediate-term corrections that periodically interrupt the direction of the Tide. And Ripples are the day-to-day market fluctuations that are of little consequence to long-term investors.

Riding the Tide

Identifying the major long-term trends early allows long-term investors to ride the Tide for many years, and in doing so make handsome profits. During the last fifty years there have been four of these major bull market trends.

  1. US stocks 1952-1966
  2. Precious metals 1971-1980
  3. Japanese stocks 1980-1989
  4. US stocks (especially technology stocks) 1990-2000

The current major bull market is in precious metals. Gold made its historic low at $255.95 an ounce back on 2 April 2001. Since then it has risen in value every single year, returning an average of 17.7% per year.

A 12 year chart of gold


Note: The gold price used in this chart is the London Bullion Market Association (LBMA) London PM fix. The price quoted is in daily price in US dollars per troy ounce. Data courtesy of the World Gold Council.

The yellow metal now trades at over $1,600 an ounce, however I believe that the bull market in gold still has a long way to go.

The recognition that the big money is made from riding the major market trends is an important lesson and one that is brilliantly illustrated in the classic Wall Street book Reminiscences of a Stock Operator.

“I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling the other customers, ‘Well, you know this is a bull market!’ he really meant to tell them that the big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend.

And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader after he knows how to trade than hundreds did in the days of his ignorance.

The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight. Old Turkey was dead right in doing and saying what he did. He had not only the courage of his convictions but the intelligent patience to sit tight.

Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market your game is to buy and hold until you believe that the bull market is near its end. To do this you must study general conditions and not tips or special factors affecting individual stocks.”

The bottom line

I believe that one of the keys to being a successful long-term investor is to identify and get on board a major bull market trend in its initial stages and then have the confidence and patience to ride that trend until it has peaked.

An investor who can do this need only make a handful of investment decisions in their lifetime, and as history shows, they can make spectacular returns.

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