The Stock Market Won't Make You Wealthy
Over the last few years I've been in the fortunate position to meet some fascinating people from all walks of life. Quite often I also get to pop the hood on their finances. The financial stories are just as varied as the people, but a select few have achieved a rather impressive abundance of wealth. I have noticed a commonality within this community: in absolutely zero instances was this high level of wealth achieved via the stock market.
So what gives?
Let me first state that the term "wealthy" can have different meanings. We can certainly have a wealth of love, bliss, achievement, relationships, enthusiasm, etc. in our worlds. These are all absolutely wonderful and fine. I hope everyone has these things. But for today's conversation, we are talking about wealth in terms of net worth. So first frame your mind on the type of wealth that turns people into legitimate balance sheet barons.
Now think about how most of us (myself included) grow our net worth. We save a percentage of what we earn, invest that money, and each year it works to continually build our nest egg. The key word here is build. We are building wealth via our savings and investments. This could be in form of cash, stocks, bonds, real estate, and so forth. This is indeed awesome and empowering. However, the truly wealthy take a different approach.
The truly wealthy do not build wealth. The truly wealthy create wealth.
It's important to make a distinction between these two concepts (building versus creating), so let's use a couple of examples to better explain the idea of wealth creation.
- A guy I know has a skill set surrounding all things home technology. After years of working as an employee at a home tech improvement company, he branched out and started his own. What began with nominal start up costs has evolved into a growing and marketable business. Let's just say the company earns $2 million this year. Assuming the business values at 2.5x earnings, he has created $5 million of wealth.
- In real estate, you can make improvements to a property which add more value to location than the costs you put in. This is another form of wealth creation. For example, let's say you buy a property for $500k and then dedicate $500k along with some time and effort towards strategic improvements. If the property appraises for $2 million after all is said and done, you have created $1 million of wealth.
These two examples of creating wealth are worlds different than building wealth by investing your money in the stock market or any other more traditional investment (buy and hold real estate included).
Now you might be saying "You're wrong. What about Warren Buffett? The guy has become one of the richest men of all time for his Oracle of Omaha stock picking prowess." I would argue that this frame of thought is incorrect. Warren built a business (Berkshire Hathaway) that catered to his stock picking talents. This business then grew into a mammoth entity that is now a worldwide icon of wealth (although he certainly has not dedicated much of this wealth towards the company website). Warren created this.
Certainly, I am not attempting to discourage people from investing in the stock market or any other buy and hold form of investment. This is the way I am growing my net worth, and the way the majority of people should indeed grow their net worth. But I do want to make the message known that rarely, very-very rarely will these types of investments hit a mammoth grand slam for your financial picture. Instead, and almost always, the true Scrooge McDuck money is a product of value creation which very often translates to wealth creation.
Let me know your thoughts on this subject. Feedback is always welcomed!