In the world of finance, we have many strategies, many different financial instruments, and thousands of advisors who will be telling you to have a unique way of making a fortune. Some of them might happen to be the right people. Some will present just the right tools. Other times, either the tools or the people handling those tools turn out to be wrong.
Especially when it comes to the people, some might be even known to be flawed in one way or another, presenting methods and strategies that turn out to be a pure gamble when it comes down to the test. Some are honest. Some are not.
Some investors have the opportunity to try out all these different ideas, tools, and strategies. Those with sufficient funds to play around and who are willing to take on all kinds of risk can experiment to find the tool and the strategy that will produce the best possible results for them. But most of us are not in this category. Those who earn a regular wage and have only the option to save and invest 10-20% of their income don’t have the resources to play around. For those I have a simple advice on how to become an investor. A successful one. It’s surprisingly simple, and it’s something that most investors know by heart, as they heard it over and over again from no one else but the worlds most famous value investor, Warren Buffett:
“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
While the context of this quote was referring to the topic of value investing, it includes a simple message: When you invest, you should focus on buying great companies at a fair price.
This simple formula established the foundation for Buffett’s success. There are of course no guarantees that this will make you a billionaire. It doesn’t guarantee that you will become another super-rich person. But by following this simple rule you will significantly improve your odds to do financially better.
So when I advise friends or colleagues on investing, I am not promising anyone that he or she will become rich. Instead, I am promising to increase their odds. By a large margin.
What are the odds
Increasing your financial well-being without investments puts you below the odds of a lottery ticket. That’s 1 in 13,983,816 (according to Google). Maybe you will find the perfect job, that will not burn you out, that you will love to wake-up for every single day, and that will pay you so well that you can comfortably retire without a single worry on the back of your mind. Maybe you will inherit some surprise fortune from your parents. Maybe you will happen to be at the right place, at the right time, to receive an opportunity of a life-time that will set you up financially for the rest of your life.
I got a suggestion. Let’s remove the word “maybe”, and replace it with a plan. Because the odds for “maybe” are not even 50:50. They are somewhere around the odds of that lottery ticket that I wrote about.
Now it’s hard to put a number on the odds of becoming rich through investments, but history and statistics put them significantly higher than the 50:50 figure. Every single investment you make stacks the odds a little bit more in your favor to have a better financial future, while at the same time it also reduces the risk of a financial failure. I recommend here a short read to put it a little better into perspective. It’s definitely better than what I could write here right now on a lazy Sunday afternoon 😉
Not all of your investments will be a success. In fact, the Pareto principle also applies to investments: 80 percent of your success will be attributed to only 20 percent of your investment. So if you invest in 10 stocks, only 2 of them will truly outperform (on average) and be responsible for 80% of your final result. Some will succeed, but on a smaller scale. Others might disappoint and underperform. But the point is that investors are actively contributing to setting up themselves for success. Because with every investments their odds increase.
So the message of this post is: When you invest, don’t do it for the promise of becoming rich. The true initial purpose is to increase your odds to improve your financial well-being. Whether it will make you rich, just financially stable or simply more comfortable, that’s another story.