To get rich slowly is both easy and difficult.
Today I want to talk about getting rich, but not in the sense of winning the lottery, but rather the kind where you are stacking one brick on the other and see your wealth accumulate over time.
We all know that investing requires a good amount of patience.
It’s not for everyone.
Some people are naturally inclined to bet everything they own on just one horse – and that is perfectly fine – while others prefer to save their money.
We could not all be savers. Not only would that be boring, but also the economy needs some of us to spend while others can save.
If you want to get rich slowly you need to be able to stay calm when the wind blows and you see your securities tumble in value.
To put this into perspective, there are two different categories of people in the market: the investors and the speculators.
While the speculators are betting their money on a particular stock very much like people do on the racetrack, an investor is taking action from conclusions and hard numbers.
He or she is not moved by flings or hypes about a certain business idea or technology that may or may not be founded in reality.
To an investor what matters are the fundamentals.
It’s those that make investing such an interesting endeavor.
Legendary investor Benjamin Graham defined what investments are like this in his book Security analysis from 1934:
An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.
That definition is still valid today.
The essence of investing is to compound the interest paid.
What this means is that you want to reinvest whatever yield you are getting back into the stock.
The goal is of course to see your capital grow, but it really grows much faster if you are compounding the interest.
To illustrate my point, let me show you an example:
Let’s say that we have 100 shares of a company, ABC Corp, and each share costs $100.
If the shares are increasing in value with 5 per cent a year then after five years they will be worth:
After 2 years the value of the stocks will be $11,025 and you’ve made a profit of $1,025.
On the other hand, if we reinvest the dividend in the same stock it will look like this instead:
If we then compare the numbers for Year 2 we can see that in Figure 1 our shares are worth $11,025 whilst in Figure 2 they are worth $11,466.
Depending on how much of your money you invest and the size of the growth these numbers will of course fluctuate. But if you buy back more stock you will compound your interest quicker.
This is in essence what investing is all about.