Investing has become an important act of personal financial intelligence in this new world. Getting rich through the stock market is not a complicated thing that requires that much IQ and Master-brain. But the reason for the failures of many people is simply because of their lack of better orientation. Here this post is designed to give you better perspectives on gaining wealth through markets and thereby making you able to think differently and in the correct manner.
“The essential thing for being successful in stock market investment is not your brain-power or IQ. It’s the patience and self-control in you”
We can work with the stock markets mainly through the following ways:
- Trading
- Speculating
- Investing
Here I will explain all these three ways with better and new notions but before that, you have to learn what is the correct definition of richness.
WHAT IS THE CORRECT DEFINITION OF RICHNESS?
I am pretty sure that you are most probably going to skip this section because everybody thinks that they have better ideas about the richness and who to call rich. I am saying surety that you will come back to read this section as you move on with the rest of the post.
Can income be wealth? For instance, is there any justification for calling a person who works for a governmental office with a $9000 salary per month rich(if you call him, then you don’t know how to distinguish richness and poverty)?
Let’s create two persons in our imagination. The first person gets $4000 per month and has a monthly expenditure of $2000. And the latter gets $8000 per month and his expenditure per month is $4000. Can you say who is richer by comparing these two people? We can say that the expenditure of both the guys is 50% of their income. So they are financially the same.
What if the second person’s expenditure was $6000 (ie, 75% of his income)? So who has better life quality? Indeed it’s person number 1 although he has a lesser salary in comparison.
So what accounts for richness?
Yeah, here’s the main point of this section. Richness is something closely related to our assets. It’s independent of income. This is the same reason why financially literate buddies advise us to create assets as much as possible. Assets can cover our expenditures and can give us the money to live though we are fired from our job.
Let’s come back to our previous hypothetical story. If person number two had created five houses and put them on rent for $900 per month, he could able to get $4500 solely created by his assets. This $4500 covers his monthly expenditure of $4000. And it gives the rest $500 into his pocket. Now he can get his whole salary of $8000 in his hands.
Now we can see that person number two is stepping into richness (not only increasing income). If he builds more and more, various kinds of assets, he becomes a true example of rich.
Now I think you may have got the correct distinction.
CAN TRADING MAKE YOU RICH?
This is the question that most people are asked to know about. I am going to give you the answer by the last of this section (maybe you could your own get the answer by reading the following).
Trading is the pure action of technical analysis on the markets. The intention of a trader, as you know, is to book profit by predicting the upcoming fluctuation in the chart (not meaning to say company!).
There are various instruments available today for the traders like options trading, futures trading, etc which are far more profitable(losable too) than the conventional method of equity trading.
Commonly people have a notion that professional traders are intraday traders who work for the present day’s dramatic events in the market. And of course, we know that they make a lot of money through these actions. But the reality is that this kind of money they are making is not accounting for their wealth(or richness)! That’s simply what we call income.
What we got from the first section of this post is the reality that income doesn’t accounts for richness(if you skipped it early click here for easy scrolling). Then how can a day trader, who creates income rather than wealth, be rich although how much he/she earns?
But I really appreciate the number of day traders even in the US market itself whose intention is to be rich but going without the right orientation.
I am not outweighing traders or trading. But I am saying that this is not the correct method if you want to be rich.
In the book “THE INTELLIGENT INVESTOR”, the so-called holy bible of investors, author Benjamin Graham (father of value investing) criticizingly states that day trading is the act of not making yourself rich but is an act of making your stock broker rich.
Every time we trade, though it was a profit or loss, our stock broker gets the brokerage. Though the whole stock market faces a hell of a loss, the stock broker is not affected! They are cool whistling at the profit of that day they could earn.
IS SPECULATING A GOOD IDEA?
Speculating is the process that most people believe is investing. A speculator holds the stock for years. But lesser than ten years(most commonly they hold for 2-3 years). Their intention is purely the capital appreciation of the company and thereby booking a profit from the money they invested. They, like the traders, take attention mainly to the charts and take decisions according to the fluctuations in the chart(traders are also sort of speculators).
The dictionary definition of speculation is itself playing with guessing. a speculator chooses to invest in a company withholding in mind the possible returns only.
Benjamin Graham, from the first chapter of The Intelligent Investor onwards, says about the difference between speculating and investing. He strongly opposes speculating as it is making our stock brokers rich rather than us.
For example, let me take the person-number-two of our previous story. I said that he created assets by building five homes which he put on rent for $900. Now let’s assume that he created all 5 houses in the year 2023 with an overall expenditure of $1 million including the land. After 3 years, when he found that a house like his’ gets $2.3 lakh on selling, he started selling all his houses. He got a sum total of $1.15 million.
Here we can see that the profit he earned is 1.15 million – 1 million = 1lakh 50000 dollars.
But the matter is that he lost his asset which could infinitely give him monthly income. Now he owns only 1 lakh 50000 dollars, not 5 good houses!
Why I said this story because of the fact that this is the same thing that happens in speculating too. What we are doing is selling our assets for money! We are selling the assets that could give far more benefits. That can give your quart-year dividends.
Now, most of you may explode saying: “What the hell are you saying. Why are we doing all this even if it’s not for money?”. My answer is “sudden money rush by exploding frequent sources doesn’t seem a trait of richness:)”
WHY VALUE INVESTING IS SO IMPORTANT?
“After I read the book the intelligent investor, I got the correct idea. And from that point, I never bought another stock, I bought businesses that happened to be publically traded. But I became an owner of the business. And I did not care whether a stock went up or down the next day, or the next week, or the next month, or the next year. I didn’t have any idea what it would do, I didn’t know what the stock market would do. But I knew businesses.”
-Warren Buffett
The stock market is actually an opportunity to build our assets. And it’s true that we can be the owner of various public companies, though how big or popular it is. We need no qualifications, any eligibility, but only some money for the company to grow. How much you invest that much you become important for the company, that much you get dividends, you get a role in the administration by having voting authority, etc.
Here comes the law of timeless investment. More often we call value investment. We are taking part in the company’s growth. The company’s x – stocks belong to you. So what is the need to be afraid and quit our possession seeing the chart’s fluctuations? Warren Buffet says that the time when the chart goes down, he is so happy because he can buy more stocks of the company at a lower price.
The theorem seems simple but people fail to follow it. Here, the main difference is that we are not creating income, but assets that can make us rich. And assets come in the true definition of richness
“if you are not willing to own a stock for 10 years, do not even think about owning it for 10 minutes”
-Warren Buffett
A sudden and huge amount of money can’t make you anything. You can’t gorge the whole of it by widening your mouth. Actually, no rich person does that. They build more assets, start businesses, or do something likewise with the excess money they earn. There are no rich who had eaten all the money they earned before they died. Nobody needs that. What we need is frequent money automatically coming to our hands created by not us but our assets which can meet our expenses.
The most common mistake happening among stock market participants nowadays is that they do not have the correct sense of investment. Their ideas are curled into the concept that “hey it’s bearish quickly sellll!” or “it’s bullish, do buy it!”. It has become something like gambling, the play of luck.
Many top traders and speculators say defending that trading and speculating is not gambling as long as you have the correct knowledge, analysis, and intelligence. My, Syamraj’s, question to them is that if you are so intelligent and have great skill and knowledge in playing rummy, won’t that be gambling? (I can see your frowned face)
