Rule of 72 question: would this ever be a viable strategy

Discussion in 'Investing' started by gtrudeau88, Mar 18, 2022.

  1. gtrudeau88

    gtrudeau88 Active Member

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    The rule of 72, in a nutshell, states that if you divide 72 by a rate of return of an investment, that is how long it will take to double your money (approximately). For example, if an investment returned 25% annually, it would take a little less than 3 years to double your money. A 2% rate will need 36 years to double.

    Now, let's assume $1000 investment and you sell a position whenever it hit 2% gain, you could sell, buy something else with the money, gain 2%, sell again etc., and you would double the money after 36 buy/sell cycles.

    Which is easier, to find 1 position that gains 25% or 15 positions of which 12 gain 2-5% in the course of a week or two? I've experienced several times where I've held a position that gains 25% and because I held out hoping for 30%, I didn't sell before a large correction and I lost my profits. What if you intentionally sold at a much lower gain % but reinvested it immediately into something else that you think will gain that small %?

    Would it ever be possible, in the real world to put such a scheme into play and succeed at it?

    Parameters:

    • $10000 spread amongst 2-3 positions at most
    • Sell once a gain reaches 3-6% or a loss reaches 3-4%. The objectives are to sell before a drop and to limit losses
      • One will need a 6% gain for every 3% loss in order to stay on track
    • After selling, invest in something that appears undervalued but that you think will accelerate in the short term
    • Repeat
    • Mentally ignore (hard!!!) what a stock could have done had you kept it. The objective is increasing the frequency of compounding. What stock that is doing the compounding is unimportant
    • Assume no trading fees or commissions
    • Assume capital gains not an issue (i.e.trading via a self-directed IRA like I have)
    • No penny stocks or short selling
    • Assume all companies chosen have sound fundamentals and are probably S&P 500 listed
    • Ignore dividends for now?
     
  2. TomB16

    TomB16 Well-Known Member

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    It is entertaining to read people's thought process. There is a clear path to success but extreme few have any interest at all in that path, particularly anyone under the age of 40.

    I wish you much success and hope you share this experiment so we can watch and cheer for you.
     
  3. gtrudeau88

    gtrudeau88 Active Member

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    Hi Tom,
    Entertainment? I better do well or my results may become fodder for SNL!!!!
    I'm easing my way into this and hope to post my results. Will likely create a more useful informative thread titled "Rule of 72 Trading Journal." I'm a little hesitant about posting too specific detail (i.e. $ amounts or # of shares), in case someone unscrupulous reads it and figures out from my username who I am, Got to figure out how to give useful info without divulging too much. :).
     
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  4. TomB16

    TomB16 Well-Known Member

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    I understand. Nothing is gained from sharing full detail but it brings significant liability.

    Good luck, GT. :thumbsup:
     

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