Why bother investing in stocks? What’s in it for you? And the answer is that stock investing can increase your wealth and income over time when done properly. It does this for you in a number of ways.
For example, much has been made of the fact that there is a widening wealth and income gap in the US. You hear this in the news all the time.
What they are talking about is the widening gap between the people in the top 10 percent of income earnings, and the bottom 90 percent. And all the facts bear this out. There is, indeed, a widening gap.
The income gap is the highest it’s been since the early 1920s. And the same can be said for the wealth gap, which has not been so high since 1927. So wouldn’t it be a good idea to do what the top 10 percent are doing — to tap into that wealth and income too?
So what are the wealthy doing to make this happen? Well, most of them are business owners. Warren Buffett and Bill Gates are two of the wealthiest people in the world. And it’s not a coincidence that they are wealthy AND business owners. As of 2015, Bill Gates, who started Microsoft, had a net worth estimated at $77,534,032,783.
Yes, you read that right. His net worth is over $77 billion dollars. And here’s another interesting fact for you. Warren Buffett, who started a company called Berkshire Hathaway, is also one of the greatest stock investors and businessmen of all time.
One of the stocks his company owns is Coca-Cola. He owns a lot of it, and he’s owned it for a long time. Coca-Cola, like many other successful companies, pays part of its profits each year to its stockholders.
Can you guess how big that check is that they pay to Warren Buffett every year? Well, as of 2013, his annual check was $448,000,000. That’s right, $448 million dollars. Just for that year. And his checks will probably grow and be even greater in future years. By the way, these checks are called dividend checks. That’s some dividend check, yes?
The lesson here is that the wealthy own companies that increase their wealth. They are business owners. And owning stocks, like Coca-Cola, for example, is one of the easiest ways to become a business owner. So let’s explore this idea further. Because maybe we should be doing this too.
Why Invest in Stocks
1. They Are The Easiest Way To Become A Business Owner
So let’s say that again. Owning stocks is the easiest way to become a business owner. When you buy a stock, you become a business owner. Really. So what does that mean? Well, as a business owner, instead of working for someone else, to increase their wealth, other people are working for you… to increase your wealth.
And these people, employees, go to work every day, voluntarily, to increase your wealth. Just like you probably go to work every day. And they take care of making and selling the products and services, doing all the accounting, keeping the stores or offices running, advertising, and all the other things that are necessary to run a profitable business.
Or put another way, they do all the things you would have to do if you started your own company. And over time, they get more customers, and increase sales and profits, and make the company more valuable year after year. What’s so great about all of this is you don’t have to do any of the work. They take care of it.
All you have to do is buy an ownership stake in the company. And as the company becomes more valuable, and generates more business, your stake, or stock (same thing) in the company becomes more valuable. Even better, many of these companies will send you a check, usually every three months, for your part of the profits.
This is known as a dividend check. It’s called dividend because they divided up the profits and sent you your part. Why would they do this nice thing for you? Because you are one of the business owners. You own part of the company. So you own part of the profit. And the company, and all of its wonderful employees, are working hard every day to increase how much profit and money you make.
Contrast this to your experience as an employee. Your employer is doing their best to keep expenses low and pay you just enough to keep you, and no more. They are not actively working to increase your pay. That’s an expense.
They are doing everything possible to keep expenses low, so that they can make money for the business owners. And who are the business owners? You know the answer to that by now. They are the stock owners. So which side of the table do you want to sit on? The employee side, where they are working to keep expenses low (that’s you and your salary)?
Or the stock owner side, where they are working as hard as possible to create more profits and wealth for you? I’m thinking the owner side of the table is best, aren’t you? And the simple way to be on that good side of the table is to own stocks. Now understand, not every business goes through the happy growth scenario I described.
Some are not well run, and some fail. But there are many good companies that are well run, and succeed. And you can become an owner by buying their stock. There’s one final point to understand. And that is that even with good companies, not every year is as profitable as other years. Some year’s profits are up, and some years they are down.
But over time, these stocks, and the stock market, just keep making more money and becoming more valuable. Which means your part of the company, and profits, keeps getting more valuable too. So let’s take a look at this. How much has the stock market grown over time?
2. The Stock Market Has A Great Return Over 100 Years
Owning stocks in the stock market has returned more to investors than most other investments. On average, the stock market has grown 8% year by year. But what does that mean to you? Well, it means that if you invested $10,000, then nine years later it would be worth $20,000.
Your investment would have doubled in nine years. So that is $10,000 in free money that you didn’t have to work for. The money just grew on its own while you were living your life, day by day. Now that 8% number I just used is a general guideline.
And it’s a pretty good guideline. However, it varies depending on what types of stocks and time frame you choose. For example, by one measure, over the last 87 years, stocks in large companies have averaged a whopping 11.8 percent a year.
Other common measures indicate the overall stock market has increased from 7 – 10% a year. And yet another measure states it has returned on average 8% per year. By taking all of these historical measures into consideration, I tend to use 8% a year as a general guide.
So let’s go with that. And here is a chart that shows the overall trend of the market since before 1920.
Now compare that to the average savings account, which pays you a measly 0.06 percent. Or worse yet, some of the nation’s biggest banks pay rates even lower, as low as 0.01%. Put another way, investment in stocks, using our 8% guideline, could DOUBLE YOUR MONEY in 9 years.
But using the .01 interest on savings from the big banks it would take 7,200 years to double your money. That’s a huge difference in speed to create wealth. So now do you understand why the wealthy own businesses and stocks?
That’s a pretty compelling reason to be invested in the stock market, wouldn’t you say? Clearly the wealthy understand this difference. And now you do too. Okay – so I used two extreme investments for comparison. There are also government Treasury bonds you could invest in, which have averaged 3.6 percent.
But it would still take 20 years to double your money. And try getting that return today, when they are actually much lower. And while we’re at it, let’s do one more comparison in the stock market. Let’s look at the return over the past 87 years for small companies. It’s a whopping 16.5 percent.
Or put another way, you would double your money in 4.4 years. Now remember, these are just averages. As the chart shows, stocks may go up more in some years, and they will lose money in others. But over time, with good stocks, it’s clear how the wealthy grow their wealth more quickly than the average person.
It’s because they are invested in stocks and businesses that grow their wealth mush faster than those who are not invested. They are being smarter with their money. And there’s another way they are smarter with their money too.
Remember when we mentioned earlier that some stocks pay you dividends? That is to say, they send you a check every three months for your portion of the company profits. Well, you won’t be surprised to find out that the wealthy are on to that game as well.
3. Think Of Stocks As Money Machines
Here’s how I like to think about dividend stocks. I like to think of them as money machines. Wouldn’t it be nice if you could just go down to Walmart and buy a money machine for $49.95? And the little money machines were advertised to create $.50 every three months.
That would be like 4 cents a week. And they would just dump this money out on the floor. And you could buy as many money machines as you wanted. Maybe every week you would buy another one.
So in a year you would have fifty-two little money machines working for you, and all of them just dumping out more money. And you just set your little money machines in a closet and forget about them. And every week they would each dump out four cents on the closet floor. So after the first week you’d have 4 cents laying on the floor from the first money machine.
The next week you buy another, so now you have two money machines. So you would get 8 cents more that week, on top of the 4 cents from the first week. The next week, three machines, so you’d get 12 more cents, on and on for fifty-two weeks. So at the end of the first year, you’d have over 5,700 pennies just laying all over the floor.
What a mess. But that’s a $57 mess. Now you can spend that $57 on anything you want to. It’s your money. It’s all from your money machines that you bought and paid for.
Or here’s a thought. You take most of that $57 and buy one more money machine. Why not, it’s paid for. The other money machines bought it for you (and you have $7 left over). So really, you can think of it as a free money machine.
Now you have money machines buying money machines for you. What a great idea. So now you have 53 money machines sitting in the closet. But it gets better. Because maybe next year all of your money machines start dumping out a little more money than they did last year — let’s say $.55 every three months instead of $.50 like last year.
At the end of the second year you’d have 11660 pennies laying all over the floor (55 X 53 X 4). That’s over $116. Now you can buy two more money machines. And the machines keep on increasing how many pennies each one dumps out by a little bit more each year.
That’s a pretty good deal. Your money machines are giving you more and more money. They are even helping you buy more money machines for free. And you aren’t having to do any work. And we haven’t even talked about the fact that after a couple of years, the price of the money machines goes up because more people want to buy them.
Because other people like free money too. So now the ones you own are worth more than you paid for them. Maybe they are all worth $55 instead of the $49.95 you paid for them. So now you have fifty-five money machines that you paid $49.95 for (let’s just say $50 to keep the math easy). And they are now worth $55 each.
So you have also made a profit of $5 per machine, times your fifty-five machines, for a profit of $275. Plus, you’ve gotten $121 from the fifty-five money machines this year, and $57 from the year before, for a total profit of $453. And the money machines will keep dumping out more money every year, and probably keep going up in value.
You paid $2600 for these money machines (you bought the first 52 at $50). And they have already paid you back $453 in value. You can see that at some point in time in the future they will have completely paid you back the $2600. And after that, everything is free money, year after year.
That’s how dividend stocks work. They give you income – that’s all the pennies laying on your floor. And over time their value goes up, so they give you growth too. Interestingly, a share of Walmart stock would cost about as much as one of our fictitious money machines we said we bought at Walmart.
And one share of Walmart stock would pay you about $.50 in dividends every three months, just like in our money machine example. So you can think of buying a share of Walmart stock as buying a money machine. And just like the value of our money machines grew over time, the value of Walmart stock grows too.
So you can think of Walmart as a stock that grows. And you can think of it as a stock that pays you income. Because Walmart pays a dividend. So let’s think about this for a minute. You can go out and spend your dividend money on a dinner at a restaurant, which is gone as soon as you eat it.
Or you can buy more shares of Walmart stock with it, i.e. buy more money machines. Nothing against nice dinners, I enjoy them myself. I’m just saying they lose value instantly. But your money machines become worth more over time. And they dump out more money every three months, year after year. Are you beginning to get the picture?
This is what the wealthy do. They spend their money on stocks, on money machines. And that’s a good reason to invest in stocks, don’t you think? And here’s another reason. It has to do with milk, roadrunners and gasoline.
I’ll bet you didn’t see that one coming. Note that in reality, some years the stock price (the value of your money machines) may not go up, and maybe even go down, and in some years it will go up even more than our example. But most of the time it will keep paying you dividends. And over time, on average, the shares of good stocks will keep moving up.
4. Stocks Beat The Robbing Effects Of Inflation
So now we know that stocks, like money machines, help increase your wealth. And here’s another thing they help you with as well. They help you keep ahead of the robbing effects of inflation. Inflation is a serious threat to you ever accumulating wealth.
On average, it will reduce your purchasing power by about 3% a year. This is not some theoretical concept. It is very real. You can easily see it in the price of basic things you buy, considered necessities by most — like milk, gasoline and automobiles.
For example, I recall back in the 70’s when you could buy a quart of milk for a dime. Today that quart of milk cost $1.99. Or take the cost of automobiles.
I paid $4000 for a Plymouth Roadrunner back in the late 60’s. It was one of those muscle cars with a big engine. Ok, hey, I was a young man back then, and a muscle car seemed like a necessity. But the point is that today, a similar car will cost you $30,000 or more. And one other example is the cost of gasoline.
Back in the early 70’s, a gallon of gas in Springfield, Missouri cost a quarter. That’s right, twenty-five cents a gallon. Today, that same gallon cost you $3.00. Those are HUGE increases in prices over those decades. What’s even worse is the average worker’s salary has not gone up as fast during this time and in many cases it’s stayed the same.
So these basic necessities, things that you have to buy to live day to day, take more of your paycheck every year. You are losing purchasing power. That’s why so many people feel like they are losing ground. Because they are.
And this point becomes even more important when you have to live off of your investments in retirement, and prices keep going up. But there is one thing you can buy, that on average, has gone up in value during that time.
And that is stocks. This is one of the reasons we see the widening gap in wealth between the top 10% and the bottom 90%. The top 10% have much more of their wealth in stocks. The bottom 90% have much less in stocks. We mentioned earlier that on average, the price of stocks has gone up by 8% a year over the last 90 years.
So even with 3% inflation, the wealthy top 10 percent of the population are increasing their wealth and purchasing power by 5% a year. How did I get that 5% number? Because the wealthy make 8% with their stocks and they lose 3% to inflation.
So they are still increasing their purchasing power by 5% a year, while others without stocks are losing 3% a year. So when you own stocks, not only are you keeping up with the robbing effects of inflation, but you are beating it and increasing your wealth. Now do you see why there is a widening wealth and income gap?
And doesn’t this seem like another good reason to invest in stocks? So here’s the good news, and our last reason to invest in stocks. It has to do with my disappointing walk across a street in downtown St. Louis years ago. And how things have changed in your favor since then.
5. Stock Investing Is Easier And Cheaper Than Ever Before
The good news is that it’s easier to invest in the stock market today than any time in history. I remember decades ago when I wanted to invest in stocks. I worked in downtown St. Louis, and there were a number of stockbroker businesses in the downtown area. And a new one had just opened right across the street from where I worked.
How convenient, I thought. I had almost no money back then, but thought to at least buy one share of stock I had read about for $80. That was all I had. But I thought, if I just got started, I could buy more stock over time.
That’s a great thought and technique by the way – to just get started, no matter how small the amount. So one day on my lunch hour, I crossed the street with high hopes to buy my stock and start my investing plan. I walked into the new stockbroker office, and a broker came over and asked if he could help me.
This turned out to be a rhetorical question, because as soon as I said I wanted to buy one share of stock for $80, he lost all interest. Not only that, he got a look of real disdain on his face and told me, not so gently, that they didn’t deal with small amounts like that. I left his office feeling a little bit embarrassed. I was clearly small change in his eyes. I had crossed the street with high hopes.
But I was re-crossing the street feeling kind of defeated. But it’s probably just as well, because back then, individual brokers charged commissions of $65 and up for a purchase. Their only other competition was with other full service brokers like them. This was way before online discount brokers came on the scene.
So since you literally had to go through one of them to buy shares of stock, they were all able to keep their commission rates high. For the stock brokers, these were the glory days, as they controlled access to the markets. For a small time investor like me, there was no glory in it at all.
They wouldn’t even deal with me. So, like I said, I walked out of his office pretty disappointed. And with a pretty bad taste in my mouth about the stock market, investing in stocks, the broker, and his business. And I pretty much gave up on the idea for a while after that awkward experience.
But over the years, the whole scene changed. And it changed in favor of stock investors like you and me. Because, with the advent of the internet, came the creation of online stock brokers. And discount online brokers as well. This meant I could open an online account on the internet with a small amount like $100 to get started.
And I didn’t have to deal with a snooty stockbroker. And I could do my own buying and selling too, online, at a much cheaper commission – like $10, versus $65 or more in the old days. So the good news is that there are a number of these online discount brokers today.
And I use one of them all of the time, to buy and sell my shares of stock. And to be fair, there are many good stockbrokers you can use today as well, if you want to pay for their services.
The guy I used in my example was just not one of them. Just my luck, I started with him first. But for now, just remember, stock investing is cheaper and easier to do than at any time in history. So you don’t need to deal with all those expenses today. And it’s all because of the online discount brokers.
Learn more about the stock market basics.