It is a well-known fact that of all the investment vehicles, stocks is the most proven and reliable method to grow your wealth. You can see many millionaires and billionaires who got rich by owning stocks and most of their wealth are tied into their own company shares. The best of all is that they get to enjoy a piece of the company’s profits through dividends.
You can see many famous businessmen like Bill Gates, Jeff Bezos and Bernard Arnault or renown investors like Ray Dalio and Joel Greenblatt got most of their wealth by owning stocks in their own companies or through stock investments.
The next questions is why most of the people could not replicate their success despite investing in the same investment vehicle? Here’s why and how you too can get wealthy in stocks.
1. SET ASIDE 25% OF YOUR INCOME TO START BUILDING YOUR WEALTH
Most people earn profits, commissions and salaries but they spend everything at the end of the month. There may be some savings for a rainy day but they do not specially allocate a portion of their money to do the most important thing that will get them rich, that is to set aside 25% of your income to build your wealth. It’s obvious that you can’t do anything if you don’t have any capital at all.
Now you may ask, “I can’t even live with the money I earn now, let alone saving up to 25%.” If we can’t save 25% of our income, then it’s time to be honest with ourselves because the fact is that we aren’t earning enough money to get wealthy. Start small first and consistently work our way up until we can earn enough to save 25% of our income and live comfortably with the rest of it. Remember that this money can only be used for investing purposes only.
2. LEARN AND SEEK WISDOM FIRST BEFORE YOU START INVESTING
Make sound investment decisions and your money will come back in abundance. The key issue here is how to make sound investment decisions. The secret is to learn about investing first before you play the game. Warren Buffett echoed this sentiment by saying, “By far the best investment you can make is in yourself.” But unfortunately, most people don’t have the desire to improve themselves because they can’t see immediate tangible returns. They forgot that any investment made in themselves will compound further and be rewarded with lots of dividends in the future.
Look, you worked hard for your money and you shouldn’t lose even a single penny. If you can’t trust a child to invest your money, then why would you trust your own inexperience to make any investments? When it comes to investing knowledge, the both of you are the same. This is exactly what a lot of poor and some middle-class people do. They make “investments” out of their gut feelings or things they might have heard from their friends and news. What always eventually happens is they lose their money or what they thought was a sound solid investment was actually a scam.
That’s why it is vital that you should learn before you earn. People can steal your money but they can’t steal your knowledge. Money depreciates but knowledge appreciates and compound. You can buy books to read or sought the advice of a mentor who has succeeded in making money in stocks. The best is to attend workshops or seminars to increase your financial knowledge. Imagine you can learn decades of proven investing knowledge and what mistakes to avoid in just a few days by listening to experienced successful investors. Our signature stock investment program called Value Investing Bootcamp is one such example that you can attend to empower your financial knowledge so you can build sustainable wealth in stocks.
3. LET MONEY WORK FOR YOU
Money can be your enemy or your friend. It depends on how you choose to deal with it. Start controlling your expenses and learn the difference between assets and liabilities. A lot of people struggle to differentiate the two. An asset is what puts money in your pocket and a liability is what takes money away from your pocket. It’s just that simple. Only buy assets if you want to get rich.
As your savings increases and now you have equipped yourself with the right knowledge, you can start looking to invest your money in the stock market. You should see your money as little soldiers going into war to bring back bounty and recruit more soldiers. The more soldiers you have, the more bounty and more soldiers they will bring back. This is the power of compounding.
One best case to illustrate the power of compounding is a company called Tencent Holdings Ltd. This company is a major gaming company and also owns WeChat which is China’s most popular messaging and payment app with a monthly user base of more than 1 billion people. Had you invested only RM10,000 in Tencent in 2004, you would have RM5,587,500 in 2018! But before making any major investment, you must first be certain about where you put your money and this leads us to the next point.
4. ONLY INVEST IN WHAT YOU KNOW AND UNDERSTAND
This sounds logical and you may think no one will ever put their money in something that they don’t even know. You will be surprise that this is very common in society. Most investors are not so much disciplined to invest inside their circle of competence. The temptation of investing in a “hot” stock where most of their friends are making money is too strong. Emotions like greed and envy will almost always overrule their judgement.
The moment when they hear this is a “good investment” on TV or a stock commentator saying this stock is the next big thing or this real estate opportunity is one you can’t afford to miss, they immediately jump in blindly. The basic rule to follow when investing is very simple, if you don’t understand it, don’t invest in it. Peter Lynch famously said, “You should never invest in any idea that you can’t illustrate with a crayon.”
Investing in something which you do not have much knowledge will lead you to the wrong evaluation and overall, it will turn out to be a bad investment. The main reason why you must only invest in what you understand or your circle of competence is because you will know where your company makes their money from and foresee how well your company is going to do in the future.
What if market crisis comes and the market misprices the stock price of your company due to fear? Because you know your company inside out, you know your company’s business fundamentals is not affected. Business is as usual for your company and people are still buying and using their products and services. That’s how you get the confidence to buy even more undervalued shares and have the conviction to hold for the long term because you know for sure your company is going to be even more valuable 10 years from now.
5. FOCUS ON BUSINESS-LIKE INVESTING AND THINK LIKE A BUSINESS OWNER
This is the most important factor that will separate you from being a successful investor and a mediocre one. Benjamin Graham once said, “Investment is most intelligent when it is most businesslike.” It means that one stop thinking of the stock they bought as green or red numbers jumping up and down on a screen and begin thinking about the economics of ownership of those businesses that the stocks represent.
You must shift your mentality now that owning a stock means a partial ownership interest in a business enterprise. That’s right, you are now an owner of a million dollar or billion dollar company. Start thinking how your CEO and management can grow your company’s business and whether your share will be even more valuable. Always focus on your company’s revenue, net profit, earnings per share and return on equity for example, not the share price.
Share price will always be volatile and this is a fact that we can’t control. We do not want to let the daily share price to influence our mood and decision making. Let’s say when the stock is up 30 percent in a month, don’t feel 30 percent smarter. Because when the stock is down 30 percent in a month, it’s not going to feel so good to feel 30 percent dumber. That’s why as long as the value of your company which is the earnings per share increases, the share price will eventually follow in the long term.
Disclaimer: All facts and opinions presented are for educational purposes only. This is not a recommendation to buy or to sell. The author involved in the writing of this message has no vested interest in the companies. Please consult a professional for expert financial or other assistance or legal advice.