Do As The Rich Do
If you wanted to be a champion in any sport you would surely emulate the moves and training of the best performers in that sport. All sports champions stand on the shoulders of those that went before.
How strange then that most people that want to be rich are not copying the techniques of rich people.
Rich people did not generally get that way by buying lottery tickets or by “betting the farm” on hot stock tips.
Rich people tend to hold blue chip type stocks. They tend to be interested in preserving their wealth, adding to their wealth, and letting their wealth compound.
When I look at the stock bulletin boards at www.stockhouse.ca, I find that the blue chip stocks, favored by the rich, are all but ignored. The bulletin boards for the likes of Manulife Financial and CN are very quiet. CN averages about 2 posts per month, while Manulife averaged about 9 posts per month recently.
Meanwhile the most popular stock on www.stockhouse.ca recently was Microcell Telecommunication, trading at 19 cents, down from a 52 week high of $4.00 and which has no earnings. On investigation, I learned that this company is currently emerging from bankruptcy and that the former shareholders will own less than 0.1% of the new company in total. The shares have value primarily because existing shareholder will receive warrants to buy more shares if the company succeeds and the share price ultimately rises. Clearly, these shares are now priced, not an investment but as a wanton speculation.
From this I draw several conclusions:
We know that rich people often hold large capitalization stocks (They would not be large cap without some pretty big individual holders) which can often be considered blue chip and which often pay dividends.
Apparently these rich people are not spending much time viewing the boards on stockhouse.ca (since almost no one is viewing the blue chips there).
The (non-rich) masses are often viewing message boards for highly speculative and typically low capitalization stocks with no earnings and getting their investment ideas that way.
If you want to be more like rich people, than start thinking about the slow but steady approach of investing in safer stocks. Stop trying to win the lottery.
Slow and Steady is Proven to work
Many individuals can afford to invest $5,000 to $10,000 per year by the time they are 30 years old. They then generally have an investment horizon of 25 to 35 years.
A reasonable after-inflation goal for investment income is in the range of 5% to 10%.
$5000 per year, adjusted upward for inflation annually, invested at 5% after-inflation, will grow to $239,000 in today’s dollars in 25 years. And to $332,000 in 30 years and $452,000 in 35 years. The figures obviously double if you invest $10,000 per year, which is well within the reach of many middle class individuals.
If you can achieve a 10% after-inflation return then $5000 per year (adjusted upward for inflation each year) grows to $492,000 in 25 years (and this is in today’s dollars, before inflation) and to $822,000 in 30 years and $1,355,000 in 35 years. Again the figures double if you invest $10,000 per year.
Over a period of years, a steady investment program is mathematically proven to produce a reasonable level of wealth.
Live Below Your Means And Invest The Difference
Studies of rich people consistently find a certain level of frugality. Most rich people do not waste money. Rich people often live in plain houses and drive quite ordinary vehicles. For more read The Millionaire Next Door by Thomas J. Stanley and William D. Danko and What The Rich Do
by Jerry White.
Invest For Tax Efficiency
Rich people tend to pay attention to tax minimization. You should do the same.
Buy and Hold
The investment community often ridicules the buy and hold strategy. It’s no coincidence that many of them earn their living through commissions on trading.
Research has indicated that millionaires tend to buy and hold. This is also income tax efficient.
Conclusion
If you want to be rich it might be a good idea to emulate the rich. That means you stop buying lottery tickets and risking your money on hot stocks. You start to use slow but steady approaches. This Web Site can help you identify relatively safe and under-valued stocks.
Shawn C. Allen
Last modified on January 6, 2003