A Framework for Building Long-Term Wealth

The Story of Polaris Investing

Index Funds = Average Returns

Only a small percentage of Americans actively invest in the stock market. Most choose to settle on the sidelines and park their money in 401Ks, IRAs, and/or index funds that receive below-average to average returns at best. 

When they do decide to invest in individual stocks, they make their selections based on hot tips or hunches. Then, they are quick to reconsider, particularly when the stock market takes a downward turn. 

What these investors lack, according Daniel Crosby, author of Laws of Wealth, is clarity, courageousness, consistency and conviction.

There’s also this concept of value investing. Heck, most of the Polaris Team grew up in Omaha, Nebraska, literally in the shadow of the “Oracle of Omaha,” Warren Buffet. How could we not know that the secret of investing is to (1) figure out the value of something, and (2) pay less for it. As Warren is famous for saying, “price is what you pay, value is what you get.”

The team at Polaris searched high and low for an investment adviser or website that could provide us with a simple and easy-to-use tool built on time-proven principles of profitable investing. We came up empty-handed.

The Thoughtful Investing Tool

That’s when we decided to create one ourselves. Polaris is the result of over 10 years of research and testing into the fundamentals of stock market investing, and specifically, theories of asset valuation — what a particular company is worth at some future date. 

Polaris provides Clarity. It is straightforward and easy to use. Most investment advisors and websites throw a mountain of data at investors, using unclear or specialized language. In fact, many investment sites are merely news aggregators — pulling data and stories from many different sources and expecting the investor to make sense of it all.

We at Polaris believe that simplicity beats complexity! We rely on a few key financial and economic variables that have been shown to be at the heart of stock valuation. These include a company’s sales growth rate, profit margin and risk relative to the market. 

Using these variables, we first calculate a theoretical investment return. Then, using a propriety algorithm, we moderate the theoretical return, taking into consideration the stock’s current price, to arrive at a practical return.

Polaris provides courageousness. We know how emotionally hard it is to do the right thing, particularly during market downturns. And there will be market downturns — probably 10+ in your lifetime. 

With our unique Practical Buy/Sell Spectrum, we give you suggestions as to when to buy, when to sell and when to wait. By the way, unlike a lot of investment sites, we at Polaris think it is OK to wait on an investment decision. Which is we provide a Waitlist feature that allows you to easily retrieve stocks you are following.

Polaris provides consistency. It is a tool that can be used all the time; by providing a consistent and elegantly designed interface. In future releases, we will provide users with alerts indicating when a particular stock price has moved from Watch to Buy to Sell.

Polaris provides conviction. With our My Investment Plans page, you will be able to set a course of action and stick with it. Soon-to-be-released notifications will alert you when the stock price moves up and down the Buy/Sell Spectrum.

Think of it as a form of behavioral coaching. We try to prevent investors from making foolish decisions during times of market upheaval. Successful investing is not about beating others, but controlling oneself.

A Final Note

In our next blog, we’ll talk about the specifics of how to use the Polaris site to get off the sidelines and earn higher-than-average returns by making thoughtful investment decisions.

One of our favorite quotes here at Polaris is…

“When the short-term stock market rocks, sleep well knowing you have done the thoughtful thing.”

 — Paul Samuelson, Nobel Prize in Economics

7 ½ Reasons Why You Should Invest in Individual Stocks

Only 15% of US households own individual stocks. This figure has not changed much since the early 60s. But there are many good and important reasons to invest a portion of your assets in individual stocks. Here are 7.5 of them.

1—You get the lousy with the great. In a typical year, just 25% of stocks account for the majority of gains in the market. Investing in a diversified/index fund guarantees you own some of the top performers, but also guarantees you own many of the losers, resulting in average performance.

2—You will never beat the market. People can toss their investment money into index funds, sit back, and simply match the market. But you’ll never beat the market.

3—When everyone gets on the same side of the boat, it tips over. Active fund managers look for a needle in a haystack. Index fund managers buy the whole haystack. The biggest danger of index funds is when most people do it. When the majority of people avoid thoughtful, individual stock selection, there is even more opportunity for investors who pick individual stocks.

4—You sacrifice returns for safety. In the past 50 years, employers have changed from pension plans to 401Ks and IRAs. This has shifted investment decisions to the individual. Unfortunately, most individuals lack investment training and feel unprepared and end up fleeing to the average performance of index funds. But too much risk avoidance leads to return avoidance and stifles capitalism.

5—The dark side of index funds. Diversified/index funds use mostly mechanical criteria and rules in selecting stocks—making them mostly momentum funds. Momentum funds buy more of stocks that have been performing well recently. This passive, follower strategy works best in a rising market. In a falling market, diversified/index funds stay fully invested and continue to buy more of stocks that are not performing as badly as the rest. The mechanical nature of diversified/index funds makes them ill-suited for making above average returns.

6—Top performers will more than compensate for a few poor performers. With a disciplined approach, it is possible to invest more in gainers than losers. Stock returns are lumpy, so in a portfolio of 10–15 stocks, 1–2 will likely do extremely well, 3–4 will perform good, 6–7 will be average, and 2–3 will perform poorly. Uncertainty or risk around how individual stocks will perform is the ante required to earn higher-than-average returns.

7—Take a stand on how you want the world to work. Part of owning individual stocks is taking a stand on how you want the world to work. Investing in stocks requires a leader mentality and that you be a steward of society’s assets. By influencing the movement of capital to its most productive use, an individual investor enriches him/herself and improves the human condition. This is similar to the duty of voting in a democracy. Being a voter and investor are adult responsibilities.

7.5—Finally, a cynical way of thinking about index funds is that people investing in them believe thinking is a waste of time.

Want to know how to start investing in stocks using a simple, straightforward approach?

Check out polarisinvesting.com. You’ll sleep well at night knowing you made a thoughtful decision.