Editor’s note: This article was first published in September 2014. The statement that the fortunes of Buffett, Bill Gates and Amancio Ortega consist largely of shares in Berkshire Hathaway, Microsoft and Inditex reflects that time; Gates in particular has since sold or given away much of his Microsoft stake.
Many people misread certain messages, so they need bringing back down to earth. You’re not going to get rich by investing in the stock market. In fact, billionaires didn’t build their wealth by buying shares.
First of all, the stock market isn’t a place to get rich, but a place to preserve your wealth and grow it. To make money in the markets, you need money. To make a lot of money, you need a lot of money.
Of course there are exceptions, like the person who turned 1,500 dollars into 1 million in a very short time. Obviously that isn’t normal. It’s a quick windfall, and what happens to people who chase quick windfalls? As a rule, they end up frustrated.
The road to wealth has no direct shortcuts, although it does have a few catapults we can use.
Every wealth-building process starts with work, saving and investing. It’s a slow process that usually pays off in building wealth for retirement: we save, we invest and we let compound interest do the work for us, whether we’re talking about fixed income or equities. That road has no shortcut, because the maths is very exact: the more money you earn to add to your principal, the faster your money will multiply.
So what’s the catapult?
The catapult for building wealth is building a business. As we’ve said more than once, the most profitable investment a person can make, and without a doubt the biggest source of wealth for today’s billionaires, is starting your own business.
It’s true that most fortunes of more than 1,000 million are made up of shares, but it’s even truer that most of those shares are in the owners’ own companies.
Whether we’re talking about Buffett, Bill Gates or Amancio Ortega, their multibillion-dollar fortunes come largely from owning shares in Berkshire Hathaway, Microsoft and Inditex. In other words, shares in their own companies.
Then trading was made easy
Trading is sold as a way to turn stock market speculation into your own business. You don’t need much money to make money. In fact, you can make money every day with very little by using leverage.
But the exposure is a trap
Trading as your main job isn’t a profitable business. Even if you’re one of the glorious 10% of traders who don’t lose money by the end of the year, once you decide to do it as a business, paying your own social security contributions and all the other costs, you’ll see that trading won’t even earn you pocket money.
That’s why the traders who make money are the ones who, on top of their trading, sell courses or books, or manage other people’s money. In other words, they make money not as traders but by building a business. And that really is profitable.
(Read: You won’t succeed as a trader, but you’ll help other people buy a yacht)
In short: have sound investment criteria, look for strong returns within your risk profile, analyse the risks carefully, and invest for the long term. That way, at some point in the future, you can get rich. But as a rule, only if you’ve earned and invested a lot of money.
What about the myth of retiring young and rich?
The same applies here, although it’s true that these days the culture of the quick windfall seems more achievable in Silicon Valley, where even kids make a million dollars or more as easily as an adult earns €1,200.
But building a solid business is also a slow, careful process in which we lay its foundations step by step. And although there are plenty of cases, it isn’t normal to retire at 27 with 7 million, as that young man did.
The reality is that most billionaire entrepreneurs are rich because they’re passionate about what they do. So if you love what you do, why would you retire? (Read: the rich don’t want to retire young and rich.)
The normal thing in business is to draw up sensible plans and strategies in line with the organic growth of the business, not to plan a quick windfall. It’s a matter of creating a business and enjoying it, helping it grow as you would a child.
When the time comes, it’s up to you whether to keep expanding the business or sell the company, if you’re not sure how to manage its future.
To sum up: if you’re an employee, start saving now, look for alternative sources of income and invest for the future. If you’re more ambitious, do the same and also build businesses to earn much more money.
Don’t pay too much attention to those magic methods that claim to know the steps or the secret to getting rich. There is no secret, because you already know the steps. The first is to work very hard, and everything else follows from there. There’s no other way.
Further reading
- How to figure out what to do: the perfect job or business for you
- The most important question for gauging the health of your personal finances
- The most profitable portfolio diversification for financial success
Featured image: Rade Nagraisalović (a.k.a. Тonka ), CC BY-SA 4.0, via Wikimedia Commons.
