ASX Education: How to make a Million

I ask for Stupid Questions in my newsletter and I get them. Here’s one memorable one: “I have $10,000 and want to turn it into a million dollars. How do I do it?” You’re thinking “How Stupid” but there are no stupid questions in this game and if you think about it, it’s actually a really good question. So let’s try to answer it. First thing to do is to accept that you will not achieve this goal without being prepared to lose all your money. You are going to have to take a risk. You know that already. Next. Obviously you will not achieve it in the bank, in cash, in property or in managed funds. There is no “average” return in any asset class that will suit you. You need to win Tatts Lotto or place and win some long odds bet at the bookies. But where’s the brains in that? And are you really going to stick $10,000 on a 100 to 1 shot. No. We need more than blind luck. Outside gambling you have two options.

1. Build a business. This is actually the most sensible option and the real answer to the question. Invest in yourself and your own efforts. But let me tell you from experience. Whilst its worthwhile, rewarding and life changing, it is a lot of effort and implied in this question is the need for making a million to be “easy”. So there’s only one option left.
2. The stockmarket. Now you’re talking.

First things first. If you try to achieve this goal in the stockmarket you will not do it through diversification. A “portfolio” is not for you. You will only achieve it through two techniques. The first is to find one stock, one fantastic “Rocket under a Rock” and ride it to a million. Or two, get a lot of stocks consistently right over a long period of time, in other words you need to develop a trading system and build the capital by consistently successful trading over a long long period of time. If you are going to build a trading system you have a lot of work to do. You’ll have to get your head in the trading game. That means getting an education in how to trade and buying the software to do it. You will find plenty of stories about that in the pages ahead. If you are going to do it in one stock then here are a few numbers. To turn $10,000 into $1,000,000 you need a stock that goes up 100 fold. That’s a 10,000% return. In the All Ords at this very moment (about 500 stocks) there are exactly 60 stocks that have in their trading histories, if you timed it perfectly from all time low to all time high, returned more than 10,000 percent. That’s a lot better odds than you might imagine. When I asked my experienced colleagues how many stocks they thought had turned $10,000 into $1,000,000 in the All Ords I got answers of 4 to 30. But its 60. That’s 12% of stocks. A huge number. Here are some of the highlights of the biggest and fastest rises in the current All Ords stocks:

• Fortescue Metals. Turned $10,000 into $73,166,166 between September 1990 and June 2008. 17.8 years. This is the biggest single return of any stock over any period in the All Ords.
• UXC Limited. The fastest of all. Turned $10,000 into $6,000,000 between June 1998 and March 2000 in the Tech boom (it was called Davnet at the time). 1.8 years.
• Paladin. Turned $10,000 into $13,500,000 between April 2003 and April 2007. 4.0 years. Third biggest return and the third fastest.

Other stocks have done remarkable things with $10,000 include News Corp. which turned it into $26,692,393 in 25.4 years. BHP into $2,543,468 in 42.2 years. QBE $12,165,775 in 32.7 years. Others that have achieved it include ANZ, RIO, Woodside, Origin, Santos, Leighton Holdings, Coca-Cola Amatil, Lend Lease. The list goes on. Bottom line, it is possible. But it is not easy and it could take 42 years. And there will be other hurdles, like how on earth are you going to stop yourself selling when you have doubled your money to $20,000. And what are you going to do when the first stock you buy falls on day one. And the big one….which stock do I start with? I have written recently about how pitiful the real average return from the stockmarket actually is. Post tax, inflation, transaction costs, management costs and the index fudge they are not the often quoted 9.5% per annum. There are no free lunches. Average returns are more like zero and because of that the stockmarket is not about averages and diversification, it is not about time “in” the market and quoting Warren Buffett, it is about timing, hard work and buying stocks that go up. The pursuit of $1,000,000 with $10,000, as unrealistic as it is, is the essence of what this game and the advice game is all about. It’s not about pretending to be fund manager, hiding in the average and relying on the long term and it is not, from a broking point of view about being a conduit for investing in the market and then sitting back and collecting fees as if you have performed a service. It’s about finding stocks that go up and avoiding stocks that go down. It’s about thinking it’s possible and applying yourself to the task. And even if you come up 9900% short, hell, you’ve still doubled your money. The stockmarket is the greatest game on earth. Aim high. Post Script You will find my article about the One Stock Portfolio below. Well worth a read for all budding millionaires. There is also another article below that called The Boat fund. It’s a true story (all my stories are true) about two blokes who turned $100,000 into $1,000,000. See how they did it.