You also know that the financial planners are right. The key to wealth accumulation is compound interest.
Financial planners almost always have good intentions. They sit clients down and explain that the key to accumulating wealth is time. If you invest small amounts of money on a regular basis, and your pile of money grows an average of 10% a year … that pile of money becomes very large over time.
To make this plan work, you need to give your money plenty of time to grow. Ideally, you would start saving while you’re in your 20s.
If you couldn’t save money when you were young, possibly because of your living expenses or since you were raising a family, a financial planner will tell you to save more now. At 10% a year, if you work an extra 10 years, the financial planning computer says you might have enough to retire.
For most of us who are not in our 20s, meeting with a financial planner is a painful process. Many of us walk away convinced that we have made big mistakes in life and see only one way to retire with financial security — we need a time machine to go back a few years so we can do things the right way.
As you know, there are no time machines.
You also know that the financial (NYSEARCA:XLF) planners are right. The key to wealth accumulation is compound interest.
What you might not know is that there’s nothing magical about the one-year time periods financial planners use in their examples. If you compound wealth more quickly, say two or three times a year, you get the benefits of compound interest even if you don’t have decades to wait.
My logic, so far, is unassailable. The question is, can you shorten the compounding period? I believe the answer is yes.
Short-term trading — holding stocks for weeks or, at most, a couple months — has the potential to increase wealth quickly. Instead of shooting for gains of 10% a year, we could pursue gains of 10% every two months and compound wealth six times faster. Instead of needing 40 years to retire, we would now need about six.
The truth is, short-term trading is possible, and it’s a time frame most investors ignore.
Long-term investors focus on earning returns over many years. Day traders and high-frequency traders are looking for gains within minutes or even seconds. The time frame between those extremes — holding periods measured in weeks — is overlooked … and potentially profitable.
When trading in this time frame, we aren’t competing against Goldman Sachs and other large Wall Street firms that are focused on extremely short-term profits. We also aren’t competing against Warren Buffett and other value investors, and we don’t need to have their patience. With this time frame, we are carving out our own niche, like my colleague Paul Mampilly does in his Profits Unlimited service.
Since we are not following the crowd in this time frame, we need to create our own tool kit because the standard fundamental and technical indicators won’t work well. (The truth is, they might never work well … but that’s a story for a different day.)
To me, the most important idea in short-term trading is peak velocity. We want to find stocks that are moving quickly, and we want to trade them only as long as they are moving quickly. When growth slows, we are on to the next opportunity.
I have a suite of indicators I use to spot stocks that are moving at peak velocity, and I have special tools for trading these stocks. That allows me to find trades such as the one in Symantec Corp. (Nasdaq: SYMC) that I shared with a small group of traders on January 6. They used my options-based strategy to make a huge gain in just three weeks.
The ideas are simple. They’re really just new twists on old ideas that everyone agrees are right, at least in theory.
But I don’t want to wait 40 years to accumulate wealth, and I don’t have a time machine. The only way I can maintain financial security is by focusing on the short term and finding opportunities that most investors never consider.