- Investing is more about mindset than about the right investments.
- A rich investing mindset allows you to make money off earnings, build wealth over time, and invest at the right time.
- Do you have the right mindset to get rich?
Today, I’ll discuss 5 reasons why many people remain poor and why the rich get richer.
Investing isn’t some kind of esoteric discipline where if you get a lucky break you will be settled for life. Investing is about having the correct mindset and not about hitting the jack pot.
Scientific studies have confirmed that those who win the lottery are far more likely to go bankrupt than those who don’t win the lottery. So the question is: Do you have the mindset to become and stay rich?
Here are 3 things that will help you to build your wealth.
Be An Investor, Not A Speculator
The current cryptocurrency bubble is a perfect example of how many people lose money while thinking they are investing. I’m amazed at how the same patterns constantly repeat themselves over time. Unfortunately, few learn from history.
Apart from cryptocurrencies, many are crazy in love with Canadian marijuana stocks, artificial intelligence, and electric vehicle producers. Bitcoin was up 20-fold in 2017, marijuana stocks were up 250%, many obscure companies are trying to make a buck with artificial intelligence, while Tesla is still burning through billions of cash quarter after quarter with only 2,000 Model 3 cars delivered in the last 6 months.
Such exciting stories usually end badly and leave the participants with a sour taste in their mouths that deters them from long term investing. Not investing for a longer period of time is what keeps many poor.
A great example comparable to the above, which many have already forgotten, is the 2013 3D printing craze where the stock of 3D Systems Corporation (NYSE: DDD) went from $4 in 2011 to above $90 in 2013 only to fall back to $8 in 2016.
Rich people do invest in these investment sectors as well, but they do it with just a limited part of their portfolio and they invest before anybody else has heard about it. This allows them to get good returns with the additional bonus if something becomes a hot investment.
Investing in marijuana businesses was like investing in any other business two years ago. Similarly, those who invested in Snapchat in the first private investing rounds have made their money many times over. Therefore, if you want to invest like the rich, you have to invest in businesses, look at how much money the business makes now, and if the sector becomes hot, fine, if not, that’s also fine.
Illiquidity Is Good, Not Bad!
I once sat down with a failed investment fund manager and he mentioned that one of the reasons for his failure was that he wasn’t able to get enough assets to manage because many in his network were rich, but didn’t have much in the way of liquid funds to invest in a hedge fund because most of the wealth was tied up in real estate with stable cash flows which was mostly spent to cover living expenses.
Many, the poor in this case, see their investment portfolio as a safety net or as a pot to tap into whenever necessary. The problem is that necessities come up more often than expected and pot stays small. 30 years pass quickly and many find themselves with the same amount they had at the beginning.
Investing for cash flow and not capital gains is something that again helps with letting the pot get bigger over time thanks to compounding, i.e. where the earnings or interest on an investment are reinvested and lead to higher earnings over time. If you sell your investments to finance the refurbishment of your house, your child’s wedding, or an expensive divorce, you won’t get rich that quickly.
Therefore, owning assets that are difficult to sell, but that give you some cash year after year, might not be a bad idea, no matter what market pundits or your banker say.
Remember, most market commentators and brokers make money on the commissions when you trade. If you buy something that makes you rich over the long term, the only person that makes money is you, and that is something that makes it worthless to talk about. Many think that buying a house or apartment to rent is a bad idea because it locks up your capital, well it does exactly that, and you know what the result is of that? It makes you rich in the long term.
Think For Yourself
The third thing that separates the rich from the poor is that the rich know what they are doing and think for themselves. This implies a high level of knowledge about a topic and constant education.
With investing, most people look at what has happened and then think that the best investments in the past will be the best in the future as well. Unfortunately, the market works the opposite way. Just think of those who invested in stocks at the end of the 1990s because stocks could only go higher and the internet was about to change the world. The internet did in fact change the world, but many ended up much poorer.
The current stock market looks a lot like 1999 and 2007, thus the outlook isn’t that positive for those who invest now. The rich invest when the majority sells. Carlos Slim, currently the sixth richest person in the world, bought 17% of the New York Times in 2009 and he sold 50% of his stake last month while others are rushing in to buy. I don’t need to mention that the stock is worth 4 times more now than it was when Slim bought in.
Similarly, Warren Buffett bought Burlington Northern SantaFe in 2008 and currently has more than $100 billion to play with. However, as there are no investment opportunities on the horizon to profitably deploy that money, he, at 87 years old, is willing to wait for better opportunities.
Thinking for yourself means that you don’t do stupid things and that sometimes you simply do nothing and wait for a good investment opportunity. If Buffett, who can get the best deals in the world, is sitting on $100 billion, you might think twice about investing in this market now.
So the rich look for business profits when investing, aren’t afraid of locking their investment for a long time, and usually do the opposite of what the majority is doing. Is that something you can do? If not, are you willing to learn? Unfortunately, the other option is one where the odds of getting rich aren’t in your favor.
Keep reading Investiv Daily as we’re always discussing how to invest for long term wealth creation.