“Someone is sitting in the shade today because someone planted a tree a long time ago.” – Warren Buffett

How to Invest in Stocks for Lifetime Wealth 

With a net worth of $66 billion, Warren Buffett is the second-richest man in America.

Most people know Buffett as a great investor.

Why? Early in his investing career, he realized that there were certain businesses that had strategic advantages – advantages that allowed them to continue to grow bigger every decade, crushing their competition over time. He figured that if he could buy those businesses when the price was right, the market would guarantee him huge, long-term profits.

And that’s exactly what he did.

Berkshire Hathaway, the company Buffett took control of in 1965 to buy such companies, has produced an average 20.3% annual return on investment (ROI) since then.

But if Buffett’s system is so great, why doesn’t every investor – professional or private – follow it?

I believe I know the answer.

The investment advisory industry – at least the way it is practiced by more than 95% of the professional community – is not geared toward long-term wealth.

I can hear you shouting already: “I don’t care about long-term wealth. I want to start making good money now. In fact, I want to get rich now!”

I hear you. But the fact is that you can’t get rich quickly in the stock market unless you are both extremely foolish and also extremely lucky. What you can do, if you are smart, is generate a reasonable amount of short-term income while you are building up a retirement nest egg that will cover all of your lifestyle expenses after you stop working.

That’s why, today, I want to focus on Buffett’s secret: generating nearly guaranteed long-term wealth.

The Power of Compounding 

Of all of the many investment strategies that exist, why did Albert Einstein call compounding “the eighth wonder of the world”?

It’s because nothing else has the power to create great wealth so surely.

Compounding works like this: You put your money in an investment that pays a return. At the end of the year, you take that return and reinvest it with your original stake. Your dividend (or interest) earns a return, too. This gives you a bigger, compounded return in the next year.

Compounding is slow and boring at first. But as time passes, the dividends get exponentially larger. Eventually, you wake up to discover that you are making huge dividends every year, while your account grows to an enormous size.

A snowball is the best analogy for compounding. As you roll the ball through the snow, the surface area gets bigger. The more surface area on the snowball, the more snow it picks up. The snowball gains mass slowly at first. But pretty soon, it’s so large you can’t move it.

Here’s an example. An 18-year-old girl puts $2000 into an account each year for seven years. Then she stops. She never puts another nickel into the account. Her $14,000 sits there, earning interest at a rate of 10% each year.

How much will the account be worth when she is ready to retire at 65?

The answer is $696,992. She will have become a wealthy woman at retirement simply because she invested a modest amount of money and allowed it to compound over time.

Not only is compounding the best way to build long-term wealth, it is also the easiest. You can take full advantage of compounding without watching the markets every day or setting stop losses or hedging your bets. The only question you must ask is what kind of investment or asset class compounds the best.

The Best-Performing Asset of All Time 

The answer to that question is easy. Compounding works best with stocks.

Jeremy Siegel is a professor of finance at the Wharton School of the University of Pennsylvania. He studied the returns of different types of asset classes like cash, gold, Treasury bills, bonds, and stocks over a 211-year time frame.

The results were astonishing.

From 1802 to 2013:

* $1 kept in cash would be worth 5 cents.

* $1 invested in gold would be worth $3.21.

* $1 invested in Treasury bills would be worth $278.

* $1 invested in bonds would be worth $1505.

* $1 invested in stocks would be worth $930,550.

Those are the actual numbers.

It’s clear that when it comes to building long-term wealth, stocks are the only way to go.

You may be thinking, “But 200 years is a long time. How would stocks do over a shorter period of time? Say, 54 years?”

Siegel answered that question. Between 1950 and 2003, a $3000 investment in the S&P 500 would have given you a return of $1,323,936.

That’s pretty remarkable.

But had you invested that same $3000 into three companies that have enduring, competitive advantages, your total return would have been $5,080,054 in the same timeframe!

Here are the stock-by-stock results. One thousand dollars invested turned into:

* a balance of $2,042,605 in Kraft Foods

* a balance of $1,774,384 in R.J. Reynolds Tobacco

* a balance of $1,263,065 in ExxonMobil

Why did these three stocks outperform a broad stock market index fund by four times?

It’s simple. They all focused on basic human desires and necessities. Things such as food, cigarettes, and fuel. And they all had what Warren Buffett calls enduring competitive advantages.

Siegel’s work confirms what I’ve been saying: To build serious wealth, you need to have – in addition to strategies that bring you shorter-term income and growth – a long-term strategy that takes full advantage of compounding.

The Five Benefits of Investing This Way 

To get the full rewards of a long-term strategy, you need to follow some rules. You need to select only very safe and very protected businesses. And you need to stick with them regardless of yearly results.

If you do, you will benefit enormously from a number of things.

It gives you…

1. The power of compound interest 

If you have ever looked at a compound interest chart, you’ve noticed that the upward curve of wealth accumulation begins slowly over the first 10 years and then increases rapidly after that. By year 30, the numbers are impressive. By year 40, they are simply unbelievable. For investors with meager means, they will be in the millions. For mid-level investors, they will be in the tens of millions. And for affluent investors, they will be at $100 million or more.

2. Simplicity 

When you invest this way, you don’t have to regularly monitor the markets or even worry which way they are going. You can pretty much set up your portfolio and leave it be.

3. Peace of mind 

With this sort of strategy, you don’t worry about stock market fluctuations. Not even big ones like we’ve experienced in the last few years. (Buffett says that if they closed the market for five years, he wouldn’t care.) In fact, you are happy when the market declines – even when the stocks you are holding drop.

Plus…

4. It prevents you from paying unnecessary fees to money managers, brokers, and financial planners. 

Over time, the fees siphoned away by these professionals erode your wealth significantly.

5. It keeps you from being too conservative with your money. 

One of the greatest risks you run is losing money to inflation in overly conservative investments such as cash, CDs, money market funds, and bonds. By investing in the best companies in the world, you’ll grow your money at much higher rates of return. Rates that beat the pants off inflation’s wealth-eroding effects.

It’s What I Do 

Since having my own personal Warren Buffett insight, I’ve made some decisions. Five years ago, I created a portfolio of some of the best businesses in the industry and invested millions of dollars in them.

Even if I never work another day in my life, and even if the stock markets crash, the dividends alone from these stocks will still pay me over $100,000 per year.

If you invest this way, you could have a portfolio that could do the same.

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“Intelligence without ambition is a bird without wings.” – Salvador Dali

10 Ways to Get Rich as an Employee 

Most people know me as an entrepreneur, a person that has started and/or consulted with dozens of successful multimillion-dollar entrepreneurial businesses, and the author of Ready, Fire, Aim, a NYT bestselling book on entrepreneurship.

In fact, I made my first 10 million as an intrapreneur – an employee that became a partner in a business that went from $1 million to $135 million in about seven years. I did that by doing everything I’m about to tell you…

1. Begin well. 

Recognize a simple truth: If your ambition is to go as far as you can go as an employee, you have to accept the fact that you have to distinguish yourself as a superstar. That means you have to be willing to do more, learn more, and care more than your peers. This won’t increase your general happiness in life, but it will give you the opportunity to have more freedom, authority, and autonomy. Plus you will make a whole lot more money. 

2. Set the only goal that makes sense. 

On day one of your new job, set this goal: to become the CEO of the company. It doesn’t even matter if that’s really not your goal. Anything and everything you can get from your current job will come faster and easier if you assign yourself this crazy goal of becoming the CEO.

3. Study the architecture. 

It’s amazing how many people come to work each day with little to no idea of what their business does or how it does it. They enter data or process accounts payable or write computer code without any knowledge of or interest in how the company works. 

Remember: The goal you’ve assigned yourself is to become CEO. That means you must take the time to educate yourself about the structure, the key people, and the basic operations of the business. Read company literature. Interview your boss and other bosses. Talk to your fellow employees. 

4. Take names. 

Walk around. Make eye contact and smile. As you expand your knowledge of the business and its functions, get to know some of the people outside your immediate work environment. Your goal is not to make friends, but to create a network of people that can help you have a bigger and more meaningful impact on the growth of the company.

5. Use your brain. 

You can’t always be the smartest person in the room, but you should seek to be. Pay attention. Ask questions when you don’t understand. Take notes. Study. Be determined to know the business inside and out. This will mean extra work, evenings and weekends. It will be a good investment of your time.

6. Catch the worm. 

Don’t believe anyone that tells you it’s quality, not quantity, that counts. Both are important. That applies to every aspect of your work performance, including the hours you work. To get on the fast track in a new company, you must not only work at least 10 hours a day, at least one of those hours should be in your office before your boss arrives. Being willing to work late shows loyalty and commitment. Arriving early shows initiative and ambition.

7. Make your first fan. 

Your fate during the early days of your employment is dependent on your boss’s opinion of you. So, make it your first priority to figure him out and become the employee he wants you to be. 

8. Be thankful and thoughtful. 

Every time someone helps you, teaches your something, or does you a favor – even a small one – send them a personalized thank-you of some sort. In some cases, an email will suffice. In other cases, a handwritten note would be better. The point is to let people know that you are open to, and grateful for, advice and encouragement.

9. Step up. 

When something bad happens under your watch, don’t make excuses. If it’s your fault, fess up immediately. If it isn’t your fault, don’t play the blame game. Explain what happened, but also take responsibility for it. You want to be known as  someone that can be relied on to solve problems, not just point fingers.

10. Get ready for a promotion. 

What is the job you should do next? The one that will advance you fastest? You should always have your eye on a position with more responsibility and authority. And usually, that means a job that can make the company more bottom-line dollars. 

Think about what that job can be and then start spending your free time hanging out with the people that are currently doing it. Learn everything they know. Help them solve their problems. Become their fervent apprentice. And when a job in their department opens up, they will think of you… and you will be fully prepared to jump on it.

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