Getting Rich Quick
Anytime there is a big, unexpected event that rattles our understanding of how the world works, it's important to take a step back and reflect on what can be learned from these events. The news cycle has been dominated by the retail investor (r/WallStreetBets) taking on big name hedge funds (like Melvin Capital) through stocks like GameStop and AMC.
I did a quick podcast episode describing what exactly happened, if you're interested in listening. I'm putting this content into podcast format now! The podcast is called "9 Minute Money Tips" and you can subscribe wherever you listen to podcasts.
So today I won't be describing the technical aspects of what went down over the past couple weeks, but want to touch on one big takeaway from this fascinating series of events. And there are a lot of takeaways but the one that I really want to talk about is:
Getting rich quick in the stock market rarely unfolds how you think it will…
I understand that is not a popular opinion right now, especially considering what just happened with GameStop, which is why people need to hear this more than ever. During times of market volatility, when there are large swings in certain stocks over a short-period of time, people convince themselves that if they just dump money in at the right time, they can become super wealthy over night. I can tell you with confidence, it rarely works out this way.
When is the last time you talked to a wealthy individual (someone you actually knew, not an "entrepreneur" on social media) whose story of wealth accumulation was due to an investment in an single stock? Or even a handful of stocks?
I have talked with a lot of wealthy people over the years (because it's my job) and that situation has never been the case.
Ninety-nine times out of 100, wealth comes from a combination of hard work, consistent savings, and prudent, patient investing. VERY few people make their wealth overnight. And when they do, it's often a result of years of hard work leading up to that, not a lucky stock pick. The problem with stock picking is that not only do you have to know the right time to get in, you also have to know the right time to get out. Miss either one of these, and it can be devastating. (For the record, short-selling is even more risky.)
The Tortoise and the Hare (Investment Edition)
Anytime somebody starts asking me about investing in individual stocks in order to get "bigger returns", I'm always reminded of the story of the tortoise and the hare.
The hare moves fast and eager early on in the race, even making fun of the tortoise for his slow pace, while the tortoise moves slow and steady. Do you remember who ends up winning the race?
The tortoise, who moved slowly, but progressed steadily until the end.
So how does this relate to stocks?
Well, everyone wants that one big stock that will pull them ahead of the curve. They want a quick and easy way to build wealth. Finding the next Tesla is much more exciting than consistently investing in a broadly diversified portfolio. It just is. There is nothing sexy about an S&P 500 Index Fund.
Having said that, an Investment Edition of the Tortoise and the Hare might look something like this:
The Investment Hare
Primarily buys and sells individual stocks
Thinks low-cost, diversified mutual funds are boring
Confident that he has insight that no one else does
Impatient
The Investment Tortoise
Starts saving early and consistently
Invests in low-cost, broadly diversified funds
Confident in the evidence of long-term market growth
Patient
Starts saving early and consistently
Invests in low-cost, broadly diversified funds
Confident in the evidence of long-term market growth
Patient
Who wins in this version of the tortoise and the hare?
Once again, the tortoise takes the lead.
And this is shown by the fact that 80% of mutual funds (professional stock pickers with access to the best information in an extremely time-efficient manner) LOSE to their 15 year benchmark. Meaning, even professional stock pickers lose the majority of the time.
So you want to get rich?
Save early and often
Diversify your investments with the help of a fiduciary advisor
Be patient
While many people made a lot of money in this GameStop ordeal, many individual investors also lost a lot of money. And to be clear, I am 100% for a free and open market where anyone can invest. But those that engage in that should also understand the risks associated with those decisions.
The likelihood that you will be able to accurately time the next big thing like this is extremely low. Unless you somehow know more than the collection of all investors in the market, limit the amount you invest in individual stocks to an amount you'd be ok losing entirely.
Keep saving and stay patient. The market will reward you for it.