Masters Series: The Power of Doing Nothing

Editor's note: No one else in finance will ever tell you this. But it's one of the most important things you'll ever learn.

 

The key to growting your wealth in the markets is to do absolutely nothing.

 

Bryan Beach is the senior analyst for Stansberry's Investment Advisory. He spends his days looking for the most promising emerging trends and the most influential economic forces affecting the market.

 

And he knows that to make the biggest profit in these kinds of long-term investments, you shouldn't "time" the market. You shouldn't stare at a computer all day. You should just buy a stock… forget you own it… and watch the gains roll in.

 

In today's edition of our weekend Masters Series – previously published in the August 8 issue of our free e-letter DailyWealth – Bryan tells the story of Crystal and Sally. Crystal timed the market perfectly. Sally was lazy and let her investment sit through booms and busts. Read on to see who came out on top…

 

 

The Power of Doing Nothing

By Bryan Beach, senior analyst, Stansberry's Investment Advisory

 

As an investor, one of the smartest things you can do is... nothing.

 

Billionaire investor Warren Buffett summarized this secret – the Power of Doing Nothing – with his famous mantra: "Lethargy bordering on sloth remains the cornerstone of our investment style."

 

I'll show you how this powerful secret works... and why – if you focus on the right investments – doing absolutely nothing can be a more successful strategy than perfectly timing the market.

 

Let's get started...

 

Take a look at one of our favorite capital-efficient businesses, soft-drink titan Coca-Cola (KO). As you can see in the chart below... from June 1998 to March 2003, KO shares lost half their value. Conventional investing wisdom would say that – assuming you had a crystal ball – long-term KO bulls should sell in June 1998 and buy back in March 2003 when the stock bottomed out... Let's test this thesis.

 

Imagine two Coke investors, Crystal and Sally, both buy 20 shares of the stock on January 1, 1990 – a $1,500 investment. Both reinvest dividends for the duration of their holding periods using a dividend reinvestment plan (DRIP). That means instead of receiving a regular dividend check in the mail, the company pays them in stock.

 

This allows Crystal and Sally to compound their investments by receiving dividends on their dividends. Eventually, this becomes like a snowball rolling down a hill – compounding their original investments exponentially.

 

Crystal also has a crystal ball... which tells her to sell in June 1998, near the market's peak. By that time, she has accumulated 180 shares (three stock splits and 20 shares accumulated through her DRIP). Crystal walks away with more than $15,000.

 

Five years later, Crystal's ball springs to life and informs her Coke is at a market low. Time to get back in. Crystal raises $7,300 and buys back those 180 shares she sold in 1998. She timed the market perfectly. She sold high and re-bought low.

 

 

In total, Crystal made two separate KO investments totaling $8,800 ($1,500 in 1990 and $7,300 at the stock's bottom). By June 30, 2014, Crystal's two investments (totaling $8,800) have turned into $36,000. She's up 309%. She's a genius.

 

Sally is not a genius. Nor is she clairvoyant. In fact, she oozes sloth-like laziness. She made her one $1,500 investment and didn't open her brokerage statements after that. It's not even clear she remembered she owned the stock when it was tanking in 1998-2003. She didn't do squat.

 

Fast forward to June 30, 2014. Sally's one investment (the original $1,500) is worth $22,000. She's up 1,333% doing nothing. (And for the record, had Sally set up a 25% trailing stop... she never would have stopped out, thanks to the dividends received.)

 

But it gets better...

 

As of June 30, Crystal has 489 KO shares, and Sally has 523 shares. So when KO cuts its next dividend check, Sally is going to get dividends on 34 extra shares. And Sally's "free share" advantage will snowball exponentially with each new ex-dividend date.

 

Now, at this point, you may be crying foul, "Why wouldn't Crystal reinvest all $15,000 she took out of her first investment?" And that's fair.

 

But remember, that means Crystal would have to sit on that 15 grand for six years. Not reinvest in other opportunities... Not blow it in Vegas... Not buy that beach house... or a cool new bike.

 

(And of course, if you have a fully functioning crystal ball, this whole essay is moot. Take it to Vegas.)

 

The key is what the "free share" effect does to like-sized positions...

 

Sally enjoyed five years of free shares that Crystal missed out on. And since KO's price was depressed while Crystal was out... Sally actually got more bang for her free-share buck when those shares began rising again.

 

Crystal missed out on dividends worth approximately 12 additional free shares while she was out of the stock. From the time she bought back in (March 2003) through June 30, 2014, what was a 12-share advantage for Sally compounded into a 34-share advantage. Again, this advantage will widen with every dividend KO pays.

 

When a stock falls, a capital-efficient investor's reaction should be, "Great! More free shares!" If you think a high-yielding stock you love long term may fall in the short term, the last thing you should do is sell and buy back later.

 

There is plenty of money to be made by speculating in the market... But for your long-term investments, it's best to forget everything you thought you knew about market timing, trading tricks, etc.

 

That's why this secret is so important...

 

Not only did Crystal pick a great stock and reinvest the dividends... but she also bought and sold at the exact right time. Despite doing all the right things and having a magical stock-picking ball at her disposal... "lethargy bordering on sloth" beat her returns. It is almost never a good idea to interrupt the compounding power of reinvested dividends.

 

Good investing,

 

Bryan Beach

 

 

Editor's note: Bryan's boss and S&A founder Porter Stansberry says big changes are coming in America… changes that will alter the way you invest, guard your wealth, and live your life. Porter says this looming crisis is more dangerous than the one in 2008. But there is a way to preserve and even grow your wealth during the storm. Click here to learn what steps Porter's taking to protect his family and fortune – and what you should do, too.