Two Powerful Concepts For Building Wealth (MUST READ)
And how to apply them
Learning how to build wealth is about more than just calculations. It isn’t only about how to invest in the stock market, how to buy real estate, or how to build a successful YouTube channel.
Learning to invest is as much about your behavior as it is about your knowledge.
Did you know that most investors in index funds earn a lower return than the index in which they invest? As shown in this research paper by Wealth Watch Advisors, the return of the average index fund investor trailed the S&P 500 by almost 3% in 2019. This may not sound like much, but when sustained over 20+ years, it can add up to hundreds of thousands of dollars lost.
The reasons — fear and greed, leading to investors chasing returns.
#The solution — selectivity and patience.
The theory of supply and demand shows that as the price of something like a cell phone increases, fewer people will want to buy it. They will find an alternative phone that fits their needs at a better price. On the other side, as the price of that same cell phone decreases, demand will increase, and more people will want to buy it. We all know that if Apple announced a sale of the latest iPhone model for 50% off, there will be long lines at the stores.
Investments, on the other hand, usually work exactly the opposite. When the market is hot, and prices are high, people pour more and more money in (buying high on the fear of missing out). When the market crashes and prices are depressed, people pull their money out (overreacting and selling low). If Apple missed their sales and profit numbers at the same time that a recession hit and their stock dropped by 50%, how many would buy when most are selling?
Buying an iPhone on sale may save you a few bucks, but buying Apple stock on sale can make you thousands — precisely because it is the opposite of what most people do.
The short-term thinking that leads to chasing returns is the main reason why investors fail to meet, much less beat, the market.
In the lead up to 2008, everyone was flipping houses, even though they were selling at record high prices. We all know how that ended. Buying high and selling low has never been a good investment strategy, even though that is what is pushed by so many “experts” (not explicitly, but by the advice, they give of when to buy and sell).
How can we counter these emotional tendencies to buy high when things are rosy and sell low when times are dark? We must control our emotions and know deep down what works in investing. This can be summed up in two concepts that are simple to understand but difficult to implement: selectivity and patience. I first heard it stated this way by investor Matthew McLennan of First Eagle on the Value Investing with Legends podcast, and it made a lot of sense to me.
Selectivity means you are careful about where you put your money. Many people spend more time and energy researching the next phone they will buy than the next investment they will make. How many people that own Tesla stock or Bitcoin have done a rigorous analysis of the value of that asset or why they believe the price will increase? A few have, but most have not, instead of investing on hope rather than analysis. This is not being selective, and it is not a good way to build wealth.
If you aren’t selective about where you put your money, it may not come back to you.
We’ve all heard stories about a friend or relative who made a deal they didn’t really understand with someone they didn’t really know, only to see their money vanish. This isn’t because of the asset they invested in but rather their own behavior and ignorance. All investments are risky if you don’t know what you are doing, and you can lose money in real estate, the stock market, or anything else if you aren’t careful.
Being careful means being selective. Only invest in what you understand and with people that you know have the knowledge and integrity required to help you succeed. Don’t invest on “hot tips” or because “everyone is doing it.”
If you are interested in real estate, you cannot just buy the first house you see and expect to make money. I often look at over 300 houses before I buy one, constantly running the numbers to understand how I will make positive cash flow and build wealth over time. Selectivity is key to success in any investment.
If you aren’t sure what to do with your money, then know that low-cost index funds are one of the easiest ways to build wealth. You can start putting your money there while learning more about investing in stocks, real estate, or other asset classes.
The second critical component of being able to build wealth is having patience. If you keep moving your money around, chasing returns, you are almost guaranteed to continue buying high and selling low. You buy what has been working (and is therefore currently expensive) and sell what hasn’t been working (and is therefore currently cheap). Also, every transaction has costs in terms of fees and taxes that will also eat into your returns.
Once you have selectively placed your money in a solid investment that you understand, you need to keep it there for a long time. Whether it is real estate or low-cost index funds, time is a huge driver of success. Warren Buffett didn’t build his fortune overnight; it took decades. He was very selective of where he put his money, and he is very patient.
If you aren’t willing to wait decades, then you will struggle to invest well.
There are risky assets you can buy that may double your money in one year, but they are risky for a reason, and you may end up with nothing just as easily as twice your money. That is why patience is key.
I currently own seven rental houses and one commercial property, with monthly cash flow and total equity of more than $1 million. This didn’t happen overnight. It has taken me more than a decade to build up this portfolio, and it may be another decade before I reach my passive income goals.
Investing is not a get-rich-quick scheme, but it can help you get rich for sure. As Warren Buffett has said:
“The stock market is a device for transferring money from the impatient to the patient.”
Be patient and you will do well.
Most investors fail to get even average market returns because they invest based on emotions rather than analysis. People invest more when markets are hot (ie, expensive) and sell when markets are down (ie, cheap). This tendency to chase returns pushes many to buy high and sell low, which will negatively impact their ability to build wealth over time.
Selectivity and patience are key to countering these tendencies. If an investor is careful with their money, only buying things they understand and know have a good chance of building wealth, they will do much better than people who throw their money at whatever is popular at the moment.
Similarly, if an investor, after buying assets carefully, can hold long-term, they will do much better than those that trade assets frequently in the search for higher returns. It takes time to build wealth, usually decades. If you are constantly jumping from one popular thing to another, your returns will lag the market.
Through selectivity and patience, a thoughtful investor can buy and own good assets that build wealth over time.
Good luck investing!
After struggling to build wealth early in my career while following traditional financial advice, I set out on a path to learn about investing. Over a decade later, I’m financially secure and working towards full financial independence through real estate and the stock market. I have succeeded in building my financial ark to help me weather whatever storms may come.
I founded Building Arks to help busy professionals like you ignore mainstream advice and build real wealth.
CONTRIBUTED BY Jason Clendenen
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