We’ve all seen the movies and read the stories about Wall Street. We’ve heard about superstar investors who made all the right decisions and are now living lives of luxury and ease. And we then experience pangs of jealousy and wonder what makes them different from us.
The answer? Not as much as you think.
For every person who’s earned millions (or more) on the stock market, there are millions (or more) who only see modest growth on their investments. And there are still more who don’t bother with the stock market at all. Finding extreme wealth on the stock market seems like nothing but a remote possibility or a fantasy that only a few advantaged people can entertain.
But while being a billionaire may not be a practical goal, it’s more than plausible to use the stock market as a means to make you financially comfortable. And depending on your standards, attention, and work ethic, it’s even possible to get what you might call well-off. Can investing make you rich?
Can the Stock Market Make You Rich? What Makes Successful Investors Different
True, many of the super-rich who gained their fortunes on the stock market have support staff, comprehensive financial tools, a deep well of experience in traditional and non-traditional investments, and at least a little luck in reserve.
But some of their traits are more accessible to common, decidedly un-super-rich investors than you might think. In many instances, they’re just different ways of thinking and behaving, not necessarily genius and guts. Which of their qualities are easier for everyday folks to obtain?
Successful investors have to take a little risk now and then. But they’re realistic about their chances. They don’t simply jump in on a stock because it seems to be on its way up in value. They weigh other factors that will either support or work against it.
They also know the stock market isn’t a foolproof, flawless machine. They’re aware that hot stocks are often overvalued when trading volume is high. They also know not all dormant stocks are sure duds. And they understand the stock market is a reflection of future expectations more than anything else. That means it’s not always representative of true value or lack thereof.
They Emphasize Intrinsic Value
Market capitalization and share price history are important considerations when analyzing a stock. But successful investors also place high importance on intrinsic value. This includes what a company does or produces, how their business model is set up, what their governing principles and leaders are like, how they contribute to their market sector.
A company may be experiencing a downturn in overall market value, but still might be worth investing in if their intrinsic value is sound. Successful investors look for companies that seem undervalued but are built for eventual success in the future. And they shy away from companies whose share prices seem to be hiding deep, fundamental flaws.
They Invest In What They Know
Successful investors know the limits of their expertise. To that end, they only invest in businesses they understand, preferably ones that specialize in industries they’re very familiar with. If they’ve made a lot of their fortune as an entertainment executive, they probably don’t have a lot of residual knowledge about medicine (unless they made a career switch after medical school).
At the very least, successful investors take time to learn exactly what every company in their portfolio does, down to an acceptable detail. A common rule of thumb is for an investor to be able to explain what every business in their list of holdings does in one or two sentences, tops. (Relatively brief sentences, at that.)
The stock market seems to have this image of urgency. Maybe it’s because we’ve all seen scenes from the trading floor at the stock exchange where people are screaming prices, tossing paper slips, and generally acting out. The stock market is indeed defined by its volatility — unfortunately, so are some of the investors who play it.
Rich investors, however, know the added value of patience. They don’t want to miss out on opportunities, but they also don’t react instantaneously for fear of missing out. They’re not afraid to wait until conditions turn in their favor before executing a transaction.
Their Holdings are Diversified
People who get rich on the stock market don’t put all their eggs in one basket. They maintain positions in several companies, across different business sectors and market caps. One might think because information technology has the highest market cap of all industries, it’s the only sector worth investing in. But all it would take is another dot-com bubble burst, and an IT-only portfolio would get nearly wiped out.
A diversified portfolio is better protected against steep market declines in individual business sectors. It’s a very common feature in the portfolios of the richest stock barons in the world.
Can Investing Make You Rich? Some Strategies for Success
So what can you do to enhance your chances of becoming the world’s next investment superstar? While we don’t guarantee that everyone who follows these strategies will soon be bumped up to A-list status and can start shopping for chalets in the hills of Switzerland, they’re certainly fine ways to start.
Define Your Investment Goals
Every investor has an objective with their stock portfolio. Before you say anything, that means something a little more specific than “getting rich.”
It’s safe to say most everyday investors seek to provide for themselves in retirement. Others may wish to save up for big expenses, like a house, car, or college tuition. Still others want to use their portfolio to fund other investments or business opportunities.
It’s important to take a long view of your investment goals. But it’s fine, even practical, to start with some incremental ones to get you started. Don’t worry that they might change — because they very well may. Just determine what you think you’ll need in the next few years.
Focus on Growth
Most rich investors have a bedrock of value stocks. We agree it’s important to have a few “sure things” — big companies that won’t fail — as part of your portfolio’s foundation.
But the most successful investors take careful consideration of stocks that have the best potential for future growth. That means going outside of the comfort zone of value investing and taking on some calculated risks. If you’re seeking to make bigger gains, you’ll be looking for those lower-valued stocks with great intrinsic value and future potential.
Do Your Research
Since you’ll be taking on riskier securities, due diligence is absolutely crucial. Research every single company you’re interested in, thoroughly, before you invest in it. This is much easier to do these days since online brokerages have multiple chart views and excessive information about every commodity they sell.
If you don’t know what to look for, step back and take some time to learn more about how the stock market works. There’s a lot of solid free information out there, and some relatively inexpensive online classes that can give you a good starting knowledge on your way to success.
Review Your Portfolio Often
Don’t just set and forget your portfolio. You need to monitor its movements, even if it’s just for five minutes a day. You’ll see what companies are working for you and which ones aren’t. You’ll be better able to diversify your holdings and perfect your asset allocation. You’ll have a better sense of what stocks to hold onto and which ones have possibly hit an earnings plateau. Again, this is much easier to do with online brokerages these days.
Can You Get Rich from the Stock Market? Traps to Avoid
All sustainably wealthy investors are experts in avoiding certain behaviors and thinking that will detract from their portfolios’ value. Some of the pitfalls to avoid include:
The stock market’s volatility makes quite a few investors irrational. They panic when it drops and get giddy when it soars. Those emotions lead to faulty investment decisions. Always approach possible investments from a thoughtful, analytical standpoint — never from a “gut” reaction, no matter what shape your stomach’s in.
Investing With the Crowd
It can be tempting to buy a stock when everyone else is doing it. But that high volume of trading is what’s driving the share price up. By the time it gets to you, your potential profitability from buying it may be minimal or non-existent. Don’t race to keep up for the sake of keeping up.
Investing More Than You Can Afford
Making regular contributions to your investment account is a great idea. But don’t do so beyond your means. Budget your stock contributions just as you do with your household budget and living expenses. You’ll be able to afford to invest more at some point, but for now, only spend what’s practical.
Can investment make you rich? While there are no guarantees, with tempered expectations and due diligence, it can certainly make you much better off than you are now.
Gorilla Trades: Your First Stop on the Road to Riches
Can stocks make you rich? Gorilla Trades can’t promise that you’ll own multiple yachts or launch your own satellites into space. But our stock picks are great ways to start. We’ve helped thousands of clients get far more comfortable with our expert advice and trading strategies. Get a free trial to find out more.