When the financially most successful people on the planet are having discussions, it might be not a bad idea to listen. And there is a famous quote from Warren Buffett, which came up during a conversation between him and the currently richest man on earth, Jeff Bezos, the CEO of Amazon.
During this conversation, and those two being longtime friends, Jeff Bezos asked Warren Buffett: “You are the second richest man in the world and yet you have the simplest investment thesis. How come others didn’t follow this?” To which Warren Buffett responded: “Because no one wants to get rich slowly”.
This statement couldn’t be truer
When you think about investing money in the stock market, there is a high probability that you might have a certain picture of investors and stock traders in your mind. Successful individuals, who in your eyes made fortunes overnight. You might think about news articles when some publicly traded company reported amazing success stories with its stock price sky-rocketing by hundreds, or even thousands of percent over a few days, weeks, or months.
I am not saying that those stories aren’t true. There certainly are cases of famous companies which made some investors very rich in a short time. However, that is not really what stock investing is about.
Yes, it is possible to get rich with stocks quickly. It is also possible to lose your hard-earned money even quicker. And this is where the misconception starts because many people who lack financial education see the spectacular rise or fall of companies as something else. They consider investments as just another method of gambling. A quick get-rich-scheme with all its promises and the attached risk to it. Just another lottery. In reality, though, investing money in companies is a partnership and a commitment. And both take time to grow and to develop.
Patience is key to success
When you buy shares of a company, you become a stakeholder and thus, a co-owner. It means that from that moment on some tiny part of this company belongs to you.
If you look at investors from this angle and if you would think or consider becoming an investor, what kind of companies would you, therefore, choose to partner with?
The choice is all yours and you have plenty of diverse opportunities at hand. Would you prefer to take a stake in a new business idea? A company that may disrupt some business and that may someday produce exploding profits? Are the ideas and the team behind that company smart and resilient enough to make this come true? Or would you prefer to partner with an established business, that is growing its reach, revenues, and profits step by step?
For most people who intend to build wealth, the 2nd option will be the preferred one. The simple reason is that we do want to have some sense of security. A reliable, established and steadily growing business offers a promising risk-profit ratio. However, it does require time and patience to fully develop into a compounding source of long-term profits. It’s not a get-rich-quick scheme.
Reduce your risk with an index fund
For the average investor, Warren Buffett recommends also diversifying investments. He advises people not to buy individual stocks, but instead to invest in so-called index funds or ETFs. His preferred index recommendation is the S&P 500 which represents the largest 500 companies in the US.
When you buy this index, you become a co-owner with the 500 companies which are included in this index. The idea is that thanks to the structure of an ETF and the investment being basically split into 500 tiny pieces, your risk ratio becomes diversified and more balanced.
This works, because even if one of those 500 companies should tumble, the other 499 can easily balance out the drop. It’s a simple way for investors who don’t want to think too much about where and how to invest their money. It offers a balanced investment approach in which risks and profits are diversified. It won’t make you rich quickly. But if history is of any lesson, it will generate wealth in the long-run.