Creating wealth in the stock market - ideas

From time to time I am asked questions about the stock market, investing, owning a business, and other questions relating to generating and maintaining wealth. Most often the question for those without a high personal net worth is how to create wealth, and for those already on the path how to accelerate their growth. These are not simple questions and each has several different answers. There is no single blueprint that leads to wealth or a higher personal net worth.

Perhaps one thing I’ve noted is that anyone can create a net worth if they are willing to commit the time to it. Another universal fact, in my opinion, is that creating and growing net worth is based on time perhaps more than any other factor. I have virtually never seen anyone have a net worth that has not worked for it and spent time cultivating it. Those that have, either through an inheritance or a lottery win, generally have thrown away their wealth within 5 years because they have not built up the foundation for the funds they received.

One of the best rules of success, I feel, is something I learned from Napoleon Hill’s Think and Grow Rich. The principle is simple – Do what you do as well as you can, never worry about the money, and the money will come. It seems odd to some, but in my life I would say it has always worked. If you are not doing your best, you will never be paid as well and thus you will never have enough money or wealth for what you want. If you use your energy and time worrying about the bills or what is in your pocket, you have none left to generate the funds you need or want. Of course that is not to say that you don’t have a plan for your money, just not an obsession about that plan.

More directly I would generalize that for those looking to enter the stock market there are a couple of things you should do. Read the Wall Street Journal (or similar daily economic newspaper of high regard) for a year, ask for and read several (a dozen or more) mutual fund prospectuses, and get a stock broker you are comfortable with. While all that is happening, set a budget that takes 5-10% of your discretionary income (at least, more if it’s affordable) and set it aside in a separate savings account.

Now I say read the Journal because there is a terminology used in investing that is not used anywhere else. One of the biggest hurdles I hear is that people are unfamiliar with the terms used and thus are unnerved by investing. In reading the Journal daily you get a familiarity in learning those terms. (Don’t be embarrassed to have a dictionary at hand to define difficult terms, I did it and so have many – whether they admitted they started like this or not) In addition it will help you get a feel of the market and the cycle that occurs.

I recall that when I was a new stockbroker, I had a gentleman ask me if I had spent a cycle in the market. I had no idea what he meant, to which he laughed. He meant that I had been a broker for a year at least, and had seen the overall cycle of earnings reports, forecasts, reactions and other events moving the market.

Understanding the timing of the market is as important as understanding the terminology. You don’t want to buy stocks in the short-term to start with, but if you know that say the travel industry in the U.S. is weaker in the spring than say the fall or winter, you may get a better purchase price to start with. Another thing the reading will provide is the reactions that the market has to events. Whether it is a disaster, political unrest, missed earnings, or an unforeseen event companies have immediate reactions. While each reaction is individual it helps to know that missed earnings can lead to a drop in stock price for a short while, but does not mean that company is a bad investment long-term. A disaster could hit the market, but not affect long-term returns. And when a company is in trouble you can learn some of that wording as well. It’s not fool-proof, but it will help you sleep at night while others panic over something that could be minor. Trust me that I have seen this.

As you get familiar with the general market cycle and terminology read the mutual fund prospectuses. This will tell you about the goals of the mutual fund, the historical returns, the administrator of the fund, and the stocks that are – or can be – in the fund.

There are big differences in mutual funds. Some only buy bonds, some only large corporation stocks, or just banks, or just eco-friendly companies and so on. Some only look to preserve your money, some seek to grow at all costs, others are more balanced. There are funds that can buy penny stocks – considered the most speculative equity investment – others buy junk bonds – the most speculative debt investment – and some can use options – highly leveraged investments. There are funds that started on a great year for market returns (like during a market bubble) and therefore have great historical returns, improving the performance in bad years in their average, and others have been around for decades showing a more realistic return over time. Some advisors are hotshots taking huge fees for their names, others are unknowns starting out, and many are just working hard. All of this is important, to varying degrees on how well you can sleep at night and what performance you wish to have.

The last step is to get a broker. After spending time learning the terminology of Wall Street, and the reactions, and mutual funds that you are comfortable with, you now have a means to evaluate what kind of broker you want. Some are newbie’s and desperate to show performance and take risk. Some are seasoned pro’s but with huge numbers of clients. Some like to spend time talking to clients, some don’t. Some are better with a specific area in the market, like banking or biotech. What you are comfortable with will help reach your long-term goals.

And I believe a broker is necessary. The market is a constant, changing, gut-driven industry. A good broker can hear the unspoken words in an earnings report and be cautious, or have an eye for something the market will want in the future. They aren’t always right and it does cost money, but this is what they do everyday all day. It’s not a 9-5 job, and not everyone can do it. In my experience a broker may be wrong 40% of the time, but investors on their own tend to be wrong 70% or more of the time. And when you compare wins, investors on their own just don’t match up. But that is what I have seen with a good broker, which only you can decide for your self.

And I do emphasize starting to grow your wealth with mutual funds. The risk is lower and cost to invest is as well. It’s easier to add to a mutual fund position, and cost effective. The fee to a broker is not prohibitive, in my opinion. And it allows you time to see results and plan for future growth. You may not agree, but it’s one way to create a net worth and grow it.

Now this is just one suggestion for growing your worth. In the future I will mention others. They are all based on my experiences and those of friends and family. There is no guarantee they will be the key for you. I always advise speaking with a trusted professional in the field I speak about.

Hopefully this is the first step in helping you attain the worth you desire and deserve. If you have more suggestions or experiences to share, please comment. But always do what you do best; I believe that if you do that the money will come.