Over the course of a year, I end up hanging around dozens of professional traders, hedge-fund managers, newsletter writers, and financial advisors... people who control hundreds of millions – even billions – of dollars.
Every type of investment vehicle... and any type of research... is available to these folks at a moment's notice.
One question I always like to ask these guys is... What do you tell your mother and father to do with their money? Do you trade it for them? Do you tell them to stay away from stocks?
The nearly unanimous answer won't surprise you if you've been reading my company's letters for long:
"I tell my parents to invest for dividends in the biggest and most stable companies we can find."
Most people reading this essay will walk away and think, "That was a waste of time. I can't invest for dividends. I need to make money right now." Very few of these people will ever get rich.
It is nearly impossible to become wealthy overnight in the stock market. Many (if not most) of the approaches I urge readers to follow involve taking the smallest amount of risk and generating income over time.
Richard Russell is the greatest living financial writer. He is almost 90 years old now and has been writing about finance longer than most of the people reading this message have been alive. Here's what he says about the importance of "compounding" your income – that is, reinvesting the income you receive from your investments...
Compounding is the royal road to riches. Compounding is the safe road, the sure road, and fortunately, anybody can do it.
To compound successfully, you need the following: perseverance in order to keep you firmly on the savings path. You need intelligence in order to understand what you are doing and why. And you need a knowledge of the mathematics tables in order to comprehend the amazing rewards that will come to you if you faithfully follow the compounding road. And, of course, you need time, time to allow the power of compounding to work for you. Remember, compounding only works through time.
In a period of great financial uncertainty, dividends offer investors both shelter from the storm and solid total returns. But as Russell points out, this approach only works if you're rigorous, disciplined, and patient. (That's probably why it works... Few people display these emotional qualities when it comes to money.)
You have to be willing to allocate capital to these kinds of companies when they're cheap. That means when other folks don't want to buy them. You have to be able and willing to hold them for relatively long periods of time – like a decade or more.
Now... if I'm right about my audience, lots of people reading this will think, "Yes, that's what I should have done years ago. But now, it's too late." Nope. That's just not true.
It does take about a decade for the big benefits of compounding to kick in. But given the uncertainties in the world's markets, this approach is likely to beat the market right from the get-go.
If you've been making the wrong choices with money for decades, why not simply stop making those choices? You don't have to continue to be wrong. You can start being smart and doing the right thing today. All you have to do is make a few simple decisions... make a plan. And then follow it.
What does Richard Russell say about the folks who ignore this simple advice? Well, he knows most average investors won't follow a plan like this. It takes too much discipline...
But what about the little guy? This fellow always feels pressured to "make money." And in return, he's always pressuring the market to "do something" for him. But sadly, the market isn't interested... And because the little guy is trying to force the market to do something for him, he's a guaranteed loser.
The little guy doesn't understand values, so he constantly overpays. He doesn't comprehend the power of compounding, and he doesn't understand money. He's never heard the adage, "He who understands interest – earns it. He who doesn't understand interest – pays it."
The little guy is the typical American, and he's deeply in debt. The little guy is in hock up to his ears. As a result, he's always sweating – sweating to make payments on his house, his refrigerator, his car, or his lawnmower. He's impatient, and he feels perpetually put upon. He tells himself that he has to make money – fast. And he dreams of those "big, juicy mega-bucks."
In the end, the little guy wastes his money in the market, or he loses his money gambling, or he dribbles it away on senseless schemes. In short, this "money-nerd" spends his life dashing up the financial down-escalator. But here's the ironic part of it. If, from the beginning, the little guy had adopted a strict policy of never spending more than he made, if he had taken his extra savings and compounded it in intelligent, income-producing securities, then in due time he'd have money coming in daily, weekly, monthly, just like the rich man. The little guy would have become a financial winner, instead of a pathetic loser.
If you're not generating income with your portfolio every month... stop being a loser. Move your investments into the world's best dividend-paying companies.