Uncharted

The Greatest Wealth-Generating Machine – Part I

“The only thing I can’t buy is time”

-Warren E. Buffett-

I hope that by now you have understood and familiarised yourself with the two secret elements of wealth creation and investing.

One is time - the most valuable asset - the one that everyone has but only a few seem to know how to use.

And the other is the compounding effect – the eighth wonder of the world - time’s best companion.

You have seen how powerful this duo can be. As previously explained in Back To The Basics, time and compounding effects can help you accumulate much more than you think and with the right approach, they can earn you hundreds of thousands of dollars for a comfortable retirement.

“So how do I find this investment that gives me a 7% return?” or “How do I invest?” you might ask.

The short answer is by investing in the stock market.

Okay! Roll your eyes …

I get it! No one seems to have a clue about how it works. To most people, the stock market may seem like a complicated, abstract place that has a tremendous amount of faulty information; misconceptions; and bad investing practices ready to throw at you.

“It is too intimidating” …

“It is too risky” …

How can it not be when there are always uncertain market conditions headlines; sluggish economic forecasts; and stories about people losing their entire savings in the stock market?

However, I believe most of us have been put at a major disadvantage. People have been painting a gloomy picture of investing the whole time.

Back when I was a kid, I remember watching the news on TV and hearing people discussing the ups and downs in the stock market while the flashing green and red ticket symbols were running at the bottom of the screen. Being curious as always, I asked mum and dad what it was but never did they really give me a proper answer. They just bluntly told me that I was too young to understand.

For some reason, the topic of money always seemed so sensitive and was never brought up for discussion among family members or at least, when the kids were there.

As you can imagine, the dream of becoming the next Warren Buffett of an 11-year-old Danny had been destroyed right there and then.

(Fun fact: Warren Buffett bought his first stocks when he was eleven years old! Had I … never mind)

A decade and a finance degree later, the conversation I had with my parents had gone from “you are too young to understand” to “okay, you are not a kid anymore but you should not do it because it is too risky”.

They told me that investing was only for the rich because they had the money to invest and hire professionals to do it for them.

Needless to say that we are not living in a world where we can just fix things ourselves. We need professionals: we go to doctors if we feel sick; we call plumbers if there is a plumbing issue; we need mechanics if our cars break down; etc.

But to suggest that we need experts to manage and invest our money is simply not true. You don’t need to be hyper-intelligent to efficiently put your money to work. This is not a game where a guy with a 180 IQ beats a guy with a lower IQ.

As a matter of fact, the majority of experts rarely outperform the market. They want you to believe that only they can make it work. Yes, there are a few exceptional fund managers that can deliver consistent above-market returns over the long term.

However, when you consider management and performance fees, what is left for the investors is actually less than the average return that the market generates over the same period of time.

The greatest investor of all time, Warren Buffett, recommends most people should just invest in an index fund (or exchange-traded fund). You don’t need much money to start, the risks are low, and on average, it will make you more money in the long term as long as you develop a sound strategy, stick to it, and don’t interrupt it unnecessarily as Charlie Munger, Buffett’s right-hand man, has said.

In other words, you can do just as well as (or sometimes better than) the so-called professional money managers.

And yet, “It is like gambling” dad insisted.

To some extent, he was right. Gambling is the act of speculating in the hope that something good happens typically against the odds. Going into the stock market blindly and buying stocks without doing any research and throwing darts at the board with your eyes closed are indistinguishable. You might have a better chance of success at doing the latter.

To me, investing is a game in which you can tilt the odds in your favour.

Dad reminded me of a stud poker game. In the game, each player is dealt five cards with four of them faced up. You can see most of your opponent’s hands. After the third or fourth card is dealt, it can be obvious whose hands outrank the others and who is likely to win the pot.

It is the same with investing in the stock market. There is a lot of information that is dealt faced up, if you know where to look for it.

If you are into the stock-picking business, by simply learning what companies do and asking some basic questions about their prospects, you can learn which one is likely to grow and become a winner, and which are to stay away from.

Of course, you can never be certain what will happen in the future, and no one has a crystal ball. But each time you learn something new about the business – an announcement of a steady pipeline of products; a released earning report that exceeds analysts’ expectations – is like turning up another card. And as long as the cards suggest a high chance of winning, you stay in the hand.

People who know how to manage their cards can earn a very consistent long-term return.

For the longest time, I was convinced that the stock market was a dangerous place to be and that investing was not for everyone and certainly was not for me.

But I have chosen Neo’s path and taken the red pill from Morpheus to enter the Matrix.

Now it is your turn!

Thanks for reading!

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