Why the Rich Get Richer and the Poor Stay Poor
It’s no secret the rich tend to stay rich and the poor rarely find their way out of money-grubbing.
The chances of someone of little means finding his or her way to considerable wealth are that much lower.
The question begs: what, exactly, separates the rich from the poor?
Too many people assume the wealthiest people rely on connections, luck or an inheritance to build wealth and retain it across posterity. In reality, those who continue to grow their fortune almost always take a different path than the rest of the investing crowd. Being a rebel has the potential to pay massive dividends in the investing world. Swim against the tide, buck the trends and you just might develop a successful investing strategy that stands the test of time or at least nets you a quick profit that you can spread out across a diverse portfolio.
What Separates the Rich From the Poor? Risk Tolerance is a Large Piece of the Puzzle
An investor’s tolerance for risk is a good indicator of his or her chance for building wealth. There has to be some tolerance for risk in order to make a meaningful amount of money in a reasonable amount of time. In some cases, a stock or mutual fund with heightened risk is that much more of a prudent investment than one with minimal risk. This is your chance to have your money work for you. Tolerate risk, take a few chances and you might end up investing “house money” in the near future while other more conservative investors are still waiting to make an initial profit.
The moral of the story is an overly-conservative approach to investing is nearly akin to sitting on the sidelines and doing nothing. Embrace risk to a certain point and you will be on your way to compounding wealth.
The Rich Do Not Take Investing Cues from Mass Media
Another key difference between rich and poor investors is those who fail to achieve investing success often allow outside forces to strongly influence their decisions. The wealthy are more self-righteous, focused and careful when it comes to investing. Ask any successful investor about investing in a business featured in the public spotlight and he or she will likely state by the time it is on the news, the opportunity is gone.
Be Open to the Contrarian Strategy
Contrarian investors almost always do the opposite of what the investing masses do. This means if the masses are bullish on the market, contrarians will short stocks or buy put options, expecting the market to go down. Though this may seem like an odd strategy to inexperienced investors, it works if applied in a careful and timely manner.
Those who can separate fact from hype capitalize on over-eager investors and novices looking to make a quick buck by riding the wave. Keep an open mind to the contrarian investing strategy, recognize the fact that the investing world is rife with followers and you just might make a substantial amount of money.
The Difference Between Rich and Poor: Shrugging Off Investing Tips
I won’t pretend advantage doesn’t exist in the world. There are plenty of people who got lucky on a stock pick, were born into the right family, or married someone who was.
But plenty of the 1% have achieved their position on the economic totem pole for good reason, having earned their wealth or become savvy investors after inheriting money. The poor are more likely to consider investment tips doled out by supposed experts only to lose their money. A reality that I don’t think is fair.
Alternatively, those who have had their own success in the market are less inclined to follow the advice of false experts. Investment tips are a lot like opinions–everyone seems to have them.
Don’t be gullible. Don’t assume another person’s information or research are accurate. This is your chance to demonstrate irreverence for convention, break free from the pack and think critically before investing your hard-earned savings.
Key in on Value
Value is the name of the game when it comes to investing as well as business.
However, defining value is a challenge.
This word means different things to different people. In the context of investing, value is typically thought of as the stock price in relation to the total number of shares. Like I discussed in yesterday’s issue, there is also a lot of value to be gained from stock charts. Furthermore, value has considerable meaning in the context of investing in terms of a business’s price to earnings ratio, commonly referred to as the P/E ratio.
P/E ratios account for important fundamentals. This number is especially valuable when comparing companies that do business in the same industry. The P/E ratios can be compared against competing businesses as well as the industry average.
Make prudent use of these tools, and you will be able to identify lucrative opportunities for overlooked value. Alternatively, the charts and this important ratio can also be used to review stocks in an investment portfolio to pinpoint those that might be overvalued.
Successful investors also key in on ratios like the price-cash flow ratio. If a business’s stock price is fairy low in relation to operating cash flow, it is a good sign the stock is valued below where it should be. Savvy investors also pinpoint value with the price to book ratio. Book value is value of a company’s common stock minus liabilities as well as preferred shares. The bottom line is those who enjoy investing success are willing to put in the time or hire someone to perform in-depth analyses of financial ratios and other details to determine if a value opportunity exists.
The Wealthy are Opportunists
If a stock is beaten up well beyond reason, plenty of wealthy investors will consider swooping in to take advantage of a possible “dead cat bounce.”
This is an investing term that refers to a battered stock left for dead that ultimately bounces back to life, even if only temporarily. This is just one example of how irreverence for convention and willingness to tolerate risk can pay off in a big way.
Pick enough beaten down stocks for dead cat bounces, sell following the bounce and you can profit along with those successful investors who have taken advantage of similar opportunities for years.
To a richer life,
Editor, Rich Life Roadmap