5 Tips to Start Building Wealth Right Now
READING TIME: 4 MINUTES
There’s nothing stopping you from creating wealth (well, other than fear) but it takes curiosity, discipline, a nose for asymmetric opportunities, and a lot of trial and error. An unhealthy dose of tenacity goes a long way too.
Here are a few ideas as to where to start your research on getting rich using the greatest wealth creator of all: the stock market.
1) Read Invested by Danielle Town, and Read Warren Buffett's Letters to Berkshire Shareholders (1965-2018).
There are many investment approaches to consider, and throughout the course of your live, you'll have to decide what's worth your time and what's not. I won't tell you what's right or wrong, but I will share with you the path I think makes most sense. That's investing money in a buy-and-hold fashion, based on the principles of Warren Buffett.
Don’t know who Buffett is or how the stock market works? The first thing I would do is read Danielle Town’s book Invested: How Warren Buffett and Charlie Munger Taught Me to Master My Mind, My Emotions, and My Money (with a Little Help from My Dad). The book is basically a more focused version of a podcast Danielle does with her dad, Phil, that goes by the same name.
In the book, she provides an easily accessible overview of what the stock market is, how you can approach investing in businesses (not "stocks"), and how you can ultimately use the market’s fear and greed to buy a wonderful business at a fair price to improve your odds of making great returns. It's not everything you need to know about investing, but it's the best starting point I've found so far.
If you read Invested and think "yes, this makes sense," the next step would be to dive into Warren Buffett's Letters to Berkshire Shareholders (1965-2018). This is basically the bible for those of you who decide for yourselves that stocks are connected to real businesses worth buying, and not just digital stock tickers that inexplicable go up and down in price.
Warren Buffett is arguably the most successful investor ever. He has compounded money at about 19 percent annually over 53 years (see his 2017 Letter to Berkshire Shareholders for reference). Go ahead, open your calculator app and compound $100 at 19 percent a year for 53 years and see how much money you’d have… yeah, he’s a pretty good investor.
When I first started this journey, there was no difference in my mind between Bernie Madoff and Warren Buffett. They were one in the same to me - financial giants who had made billions. Of course, one is in jail for life for a Ponzi scheme fraud, while the other seems to be one of the most articulate, honest, and kind-spirited billionaires out there.
If you read the "Buffett Letters" and take them to heart, you'll be further along in this game than you ever thought possible. Famous value-investor Mohnish Pabrai credits Buffett’s letters as having radically changed his life for the better. Maybe they’ll do the same for you.
2) Spend less than you make, and save the rest.
You can't invest money you don't have (well actually, you can - investing with borrowed cash to boost returns). But no matter your income or your financial situation, you need to learn to live below your means, so that you can save money and stash it away.
It may sound painful, but it's worth it. And you can still have fun while you save. You can save for your vacation and your retirement- it just takes discipline and a cold, emotionless look at your finances. There are all sorts of books and articles, as well as finance apps the can help you to save money every month. Use them to help take control of your finances.
3) Understand the power of compounding interest.
The sooner you can hammer into your skull the power of compounding interest, the richer you are going to be. Basically, compounding interest is when you make money off your original deposit, plus the interest on that deposit. So if I deposit $10, and get a 5 percent annual interest rate, after one year, I have $10.50. After year two though, I've not compounded $10, I've compounded the $10.50 - giving me $11.03 total after 2 years.
Play with the math yourself, and you'll realize that if you can find a wonderful business to compound your money at a high rate of return for 20+ years, you will become rich. This is also why interest on credit cards and student loans can be so crippling. And, it’s why the small fees you may be paying to your local bank for investing your money are actually destroying your retirement. Whatever you do, make sure compounding interest is working for you, and not against you.
4) Learn to mirror other great investors.
Ok, so you've read some books, you've crunched some numbers, and you're ready to buy a business with your cash. But where do you start? The first company I ever bought was a Warren Buffett investment. I couldn't tell you how this company made money (immediately breaking Buffett and Charlie Munger’s rule to only invest in companies you can understand…) and I sold very shortly after I bought it. But, at least I was in good company for the three or so days that I did hold shares. My point is this: there are very good investors that you can follow who evaluate stocks like they are businesses. You can even see what they are buying, when (generally) they are buying it, and within what price range they bought it in. Why not go swimming with a life jacket on?
In fact, some of those great investors even mirror other investors they like. Pabrai says in a 2018 interview with IndiaTimes.com that, "Cloning is very good for your financial health. There are lots of smart people in the investment world and it is very much worth looking at what their highest conviction bets are...” Now, if Pabrai is mirroring other investors he admires, we should definitely be mirroring great investors. Mirroring does not mean blindly copying. It means researching and understanding the business, and then making an informed decision to purchase shares. But now you have some peace of mind knowing you went in with another investor who has a proven track-record of great returns.
5) Buy a small amount of shares and learn that the accumulation of wealth is just a game.
I'm a veracious reader. I love reading about other people's experiences, learning from their mistakes, and slowly (ever...so...slowly...) expanding my circle of competence. But not until you buy your first company do you really find out what you’re made of. All that reading is great in theory, but when you are down 40 percent with a stock you were certain about, your mind takes over, your confidence crumbles, and your patience evaporates.
But this is when you learn that wealth is just a game. The accumulation of wealth is just a game. Say it with me. The accumulation of wealth is just a game. Because no one died. You are healthy and alive. And if you want to be RICH (please go read How to Get Rich: One of the World's Greatest Entrepreneurs Shares His Secrets by Felix Dennis - it will help you to internalize this, as well as test your metal to see if this way of life is for you...), then learning to play the game is what you'll have to do. And if you are who you think you are, it will be well worth it.
These are five small steps you can take toward securing a financial future of wealth. It won’t happen today or tomorrow, but if you start each step with renewed enthusiasm and a willingness to learn something new about investing, then you are going to wake up one day financially free. It’s just up to you as to how soon that day arrives.