There is a famous quote from Warren Buffett, which came up during a conversation between Mr. Buffett and the 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. Think about Amazon, Tesla or Apple.
However, that is not really what stock investing is about. Yes, it is possible to get rich with stocks quickly, as it is possible to lose your hard earned Euros even quicker. And this is where the misconception starts, because to many people who lack financial education, the spectacular rise or fall of companies gives them the overall impression, that investments are more or less just another method of gambling. A quick get-rich-scheme with all its promises and the attached risk to it.
This could not be further away from reality and the truth.
In reality, though, investing money in companies is a partnership and a commitment. And both take time to grow and to develop. 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 now belongs to you.
If you look at investors from this angle and if you would think or consider about becoming an investor, what kind of companies would you, therefore, choose to partner with? Do you have the knowledge, time and resources to make this kind of decision?
Warren Buffett recommends another way. He advises people to buy simple index funds. So-called ETFs. His preferred index recommendation is the S&P 500 which represents the largest 500 companies in the US. It means that when you buy this index, you become to a tiny part a co-owner with the 500 companies which are being included in this index. The idea is that those large companies offer a higher degree of security and thanks to the structure of an ETF and the investment being basically split into 500 tiny pieces, your risk ratio becomes very balanced. Even if one of those 500 companies should tumble, the other 499 can quickly balance that off.
This is a simple way for investors who don’t want to think too much about where and how to invest their money.
Going public for a company always means to have a risk-management system in place
So on one hand, investing in an index fund is a way of risk management. What many people don’t think about is that by investing in large companies you are adding one additional layer of risk protection to it. How so?
To give it a little more perspective, first and foremost one needs to realize and always remember, that companies are people. Behind every company name, every brand and every stock is a smaller or bigger group of owners, managers, and employees who got the courage, the idea and the willingness to create and sell a product or a service on a scale large enough to go public. This means that you have plenty of (hopefully) sharp minds focusing on growing the companies and therefore the value of the stock.
One should also never forget, that going public is a serious matter, restricted through plenty of regulations and secured throughout several processes to minimize the risk of fraud. At the same time, the company needs to have a business model in place that is convincing and promising enough to grant the entrance on the floor of the stock exchange.
And not only entering the stock exchange is serious, remaining there is almost as hard as getting in. The requirements on financial disclosures, presentations and constant valuation of every business move and every larger business decision will put companies under a never-ending reporting stress that requires disclosures and efforts beyond the imagination of any small-business owner.
I am not saying that it’s impossible to cheat here, but I am saying that there are checks in place that allow reflecting, analyzing and evaluation of any listed business in a very detailed manner, thus putting the odds much stronger in favor of a potential investor.
The odds are in your favor
Having such an extensive risk management system in place will clearly increase your odds of coming out successful from your investment thesis. This odds, however, are increasing even more significantly over time. The more time you have available to invest, the higher your chances of being successful turn out to be.
Let us take a look at a graphic from a Business Insider article which I was reading recently:
This graphic represents the duration of strong and weak markets. The times when your investments grow (blue fields), and the times when your investments shrink (red fields).
One can be scared of investing money, but odds, reason, and history give a very clear recommendation. Historically, if you had time on your side, it has never been wrong to start investing. Even more so, the long-term dedication to investments has always produced tremendous results. If you invest diligently, patiently and over a long period of time, chances are that some of your financial dreams might indeed become true at some point.
There is no magic bullet. No quick get-rich-scheme. Just patience, logic, perseverance and diligence. Start following it whenever you can, as soon as you can and get used to doing it on a constant and regular basis – and great things will happen. At least that’s what statistics are telling us.