Can stocks make you rich? That’s the question on everyone’s mind. Here’s the answer.
It’s a question we get periodically: Can stocks make you rich? Let’s explore for a minute the history of this question. There’s no doubt that people would like to be rich. If you need proof, look around at all the get-rich-quick schemes that have made headlines over the years.
In the early 1900s, George Parker “sold” New York City landmarks (including the Brooklyn Bridge) to unsuspecting tourists. Around the same time, Boston area investors were convinced that Prescott Jergensen had figured out how to extract gold from ocean water. Before the elaborate scam was exposed, investors were out hundreds of thousands of dollars, and Jergensen was nowhere to be found.
Even today, if you search Google for “get rich quick,” you’ll get anything from how to be a self-made millionaire to steps anyone can take to get rich to ways you can make "$537 per day” with almost no effort on your part. And we haven’t even gotten into Ponzi schemes or Go Fund Me frauds.
Stocks, however, are different. With a few exceptions, you won’t find get-rich-quick schemes in the stock market. There are regulations and requirements, financial filings, regulatory agencies, and plenty of people and organizations watching stocks closely. Does that mean you can’t get rich investing in stocks? Not at all. Just look at Warren Buffett. But still...
Can stocks make you rich? Here’s a hard look at the facts
A lot of investors like mutual funds and ETFs because of the diversification they offer. There’s nothing wrong with holding these types of investments in your portfolio, but they won’t make you rich. Mutual funds come with higher fees, have a long history of failing to beat the market consistently, and give you less control over your investments.
To get those big rewards, you have to take big risks. That’s not to say that there aren’t companies out there, like Tesla (TSLA), that skyrocketed in value. But even then, to get rich with that kind of stock, you would have to invest significant sums when the stock was in its early stages, at which point the company could have gone bankrupt.
But because most of us can’t afford to lose that much, you’ve got to control risk carefully. That sounds like a contradiction. How can you take more risk if you’re going to control for risk more tightly?
Well, the answer to that lies in the timing; you take more risk when the market environment is rewarding risk-takers, and you take less risk when the market environment is penalizing risk-takers. In that way, you come out ahead in the long run.
There’s another way to control your risk, as well. You can limit the risk of investing in stocks by limiting your losses to no more than 10-15% on any one stock.
That’s all fine and good, but can stocks make you rich? Like actually give you gobs of cash in your bank account so you can rub elbows with the likes of Buffett or Bill Gates?
Perhaps, but it’s not easy.
How to get rich with stock investing
The mistake most people make when they select a stock is this: they buy proven winners, like Apple (APPL), Microsoft (MSFT), and Netflix (NFLX). Trouble is, those stocks’ best days are behind them; they’re not likely to replicate their monster returns of the last decade in the coming decade.
The key is to find unknown stocks with lots of room to grow. These are stocks you can hold onto for years, giving them time to make you rich. We call these “forever stocks,” meaning you could hold onto them forever if you wanted to.
The key attributes we look for in forever stocks are these:
- A product or service or business model that is revolutionary
- A mass market
- A company that’s still small enough to grow rapidly
- A company that is not respected—perhaps not even known—by the majority
- And last but not least, a stock that’s trending up, indicating that investors’ perceptions of the company are improving—this is important because perceptions are always at least as important as reality
Can stocks make you rich? Yes, they can. All you have to do is buy the right stocks, stay away from the money losers, and hold on for the ride. The real question is how to do that.
Not to brag (okay, maybe a little bragging), but we’ve been helping our readers and subscribers find great stocks for decades - half a century, to be precise, as 2020 marks our 50th anniversary. Take a look around our website and then check out some of our 15 investment advisories. And feel free to let us know what questions you have about investing.
What are your thoughts on getting rich with stock investing? Let us know in the comments.