I'm always hearing stories of folks who hit it big overnight in the stock market.
They sound great, but the problem is most of them are... just stories. I've been in the markets for decades now. I spent more than 20 years as a broker, and I'm fortunate enough to have friends and associates that are among the very best traders and investors on the planet.
I've seen firsthand what happens to the people who swing for the fences every at-bat. Sure, they might hit occasionally, but when they do, it's not skill - or superior knowledge.
Most of the time... It's just luck. Even worse, most of the time that stroke of good luck is just a harbinger of really bad, bad things just around the corner.
Take this former client of mine who made a small but enviable fortune during the dot-com boom...
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How to Lose Everything and Die Broke
This guy... Like I said, he made a mint.
Trouble was, he'd done it day trading tech penny stocks as the bubble was inflating.
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I tried to get him to understand that what he'd done wasn't necessarily repeatable, and he needed to take some money off the table yesterday.
But he was so convinced he'd found some magical, eternal overnight fortune-making machine that he shook me off as an old fuddy-duddy who'd lost his edge.
Well, the story wrote itself - as it always does.
A year later he was dead broke... and trying to borrow money to keep the rent paid. The wrong kind of leverage.
If you try to get rich overnight in the stock market, the likely outcome is that you go broke. Going after overnight riches in the stock market isn't a bit different from trying the same stunt in a casino.
It could happen - it absolutely could. But the odds - the odds - are squarely against you. Again, exactly like a casino, every single person or institution you interact with is absolutely, entirely, completely, faithfully dedicated to separating you from your money as quickly as they possibly can.
That said, you can unquestionably get rich in the stock market.
But it takes time.
Here's How the Richest People on Earth Do It
The very best traders and investors out there - among us - earn returns around the 30%-per-year mark over time.
They use a lot of leverage to produce these results. They make massive bets, and they deal with volatility that would shatter the intestines of mere mortals.
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But let's say for a minute you have that rare combination of brains, fortitude, ambition, and skill that can produce 30% a year.
You know what - what the heck, let's make it 50% a year. I've never heard of anybody doing that, but let's be imaginative about this.
If you took $10,000 and earned 50% every year, year in and year out, your $10,000 would turn into a million bucks. It would take 11 years and six months for that to happen.
But say you stick with the time-tested, fabulously successful methods of Paul Tudor Jones, Stanley Druckenmiller, and George Soros (who are, Forbes estimates, worth $4.5 billion, $4.7 billion, and $8 billion, respectively). Those guys tend to compound at that 30% annual return I mentioned.
At that point, your $10,000 becomes $1 million in a little over 17 years and six months.
See: You can get rich in the stock market. Filthy rich in fact. It just takes a little time.
Think about Warren Buffett for a moment.
At any given moment of the day, he's one of the three wealthiest men in the world, depending on how Amazon.com Inc. (Nasdaq: AMZN), Microsoft Corp. (Nasdaq: MSFT) and Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) happen to be doing.
He started doing this investing "thing" in his early twenties. By age 26, he was worth about $140,000. At age 52, that net worth had swelled to $376 million.
At age 56, he finally became a billionaire. Today, at age 87, he is worth a cool $83 billion, give or take.
Buffett had a conversation last year with Jeff Bezos, the CEO of Amazon. Bezos asked him why nobody else was achieving what he and Charlie Munger had achieved.
As I've said before, the path Buffett took to get rich is pretty clear-cut, so in theory, there should be lots of Buffett-like billionaire clones.
So why the dearth of comparably well-off investors?
The answer, according to Buffett, is simple: No one else was willing to get rich slowly.
Anne Schreiber is another fantastic example. Most of us have never heard of her, but she made her fortune in the stock market.
She wasn't a hedge fund manager or even a money manager. She worked for the Internal Revenue Service (IRS) and retired in the 1940s.
At the time, she had around $5,000 and an annual pension good for $3,150.
She began investing her savings in high-quality, dividend-paying companies and reinvested the dividends. She was frugal, and each year she added to her holdings.
Importantly, she paid little to no attention to what the market did in the short term - unless it gave her a shot at adding to her holdings on unreasonably good terms. She didn't chase hot stocks or change her strategy.
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Schreiber bought in for $8,150 and held tight for a little more than 50 years. When she died in 1995, her "nest egg" was worth over $22 million.
There's Ronald Read. After service in the Pacific, North Africa, and Italy in World War II, he came home to Brattleboro, Vt., to work at a gas station and the local JC Penney store - as a janitor.
He was married with two kids, and boy, was he ever thrifty. He drove a secondhand Toyota Yaris, used safety pins to hold his coat together, and chopped his own firewood.
He also invested most of what he made all his life. He rarely sold anything and favored high-quality stocks that he just held and held pretty much forever.
Like Anne Schreiber, Read reinvested his dividend payouts, plowing the windfall into more shares of the companies he owned.
By the time Read passed away at the age of 92 in 2014, the janitor had accumulated about $8 million of stock market wealth.
It "tremendously surprised" his family. He left generous gifts to Brattleboro's library and hospital.
Like I said, you can get rich in the stock market.
Here's How to Get Rich Slowly
You need to be disciplined and follow a sound strategy based on strict valuation. I like to see P/E ratios in the single digits - the market median is 21. I like to see earnings before interest and taxes to enterprise value ratios in the single digits, too. Again, the median is 17.2. The median price-to-book value is close to 2. I want less than 1.
I'm a lot pickier than your average investor. So is Warren Buffett. During the crisis, I was looking at Walt Disney Co. (NYSE: DIS) to see if it met my "cheapskate" criteria. I factored in the scrap metal value of all the rides at Disneyland during my research.
People that get rich slowly - and permanently - are people who consider "weird" things like that.
I pore through reams of data to get to know the companies I'm buying, to understand them inside and out, top to bottom line.
I treat each and every stock purchase, whether it's a piece of an unreasonably cheap, powerfully positioned community bank, like Fifth Third Bancorp (Nasdaq: FITB) or a specialist insurance company like Tiptree Financial Inc. (Nasdaq: TIPT), as though I were doing due diligence before buying the entire business, turnkey-style.
Because, in a very real way, I am buying the business.
I want to make the market work for me when everyone is selling. When panic seizes the market, when all the quotes are "NO BID" because there are literally no buyers at any price, I want to be the shark, the buyer of last resort, who offers $3 for a quality company that'd be worth at least $25 if not for the panic. If you've done your homework, that good stock you snatched - for an 88% discount - stands a very good chance of punching its way back to $25 and beyond when things settle down. Amazon.com is a perfectly good example.
The people like me and Carl Icahn, who pay unreasonably cheap prices at unfathomably scary times, are the ones who get rich slowly.
I've never met anybody who got filthy rich in the stock market overnight and stayed that way for long.
But if you're a patient-aggressive type, it's definitely possible to get close to 20% a year. At that point, it's almost inevitable that you'll hit millionaire status. It's just a matter of time, of doing it slowly.
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About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.