What Common Stock Investing Can and Cannot do for your Net Worth

I have dedicated a significant percentage of this site to discussing investing and the wondrous things it can do.  What I haven’t done is touch on what it cannot do.  A long body of academic research in the US has shown that investing in stocks following specific strategies has lead to a higher net worth than investing in other assets such as bonds or real estate.  The pitfall is that unless you had a grandparent invest for you, the wealth stocks will make for you will come at the latter stages of your life.  In order to generate faster wealth than common stock investing, you have to develop a different skill set.

I have written about how common stock investing can make you rich in previous posts.  For a lot of people, waiting decades to get rich is too long a wait.  The focus is about how to make yourself money today.  The wealth researcher, Thomas Stanley, called this playing good offense.  Good offense in this case means that a person has worked their way into generating a high amount of income.  Personally, I define good offense as being able to generate six figures in income.  According to official figures, that would place you in the top fifth of income in the US.  In order to do that, there are only a few roads you can travel.

The most common route for people playing good offense is that they develop a rare and valuable skill set that they sell for a wage.  How many people can perform brain surgery vs work the register at McDonalds?  An extremely large part of the reason why brain surgeons can get paid $200 an hour vs $7.25 is because so few people can get through the process to become one.  A patent lawyer that wins cases for pharmaceutical giants will always be paid more than a school janitor.  This route requires decades of schooling, and a good work ethic.  If you want to generate a high income, this is the most traditional route.

Outside of developing specialized skills, there are a few possibilities.  If you have computer or business skills, that opens up some options.  Writing code for scalable operations and structuring a favorable deal can result in windfalls.  Creating a business that serves a unique niche in your community can also be a pathway to playing good offense.  In The Millionaire Next Door, Thomas Stanley details stories about plumbers, car wash operators, and auto dealers building wealth.  A common thread is that many of them observed an opening, and they exploited it for financial independence.  The limits are your ingenuity, talent, and guts.

I would be remiss if I didn’t mention that some common stock investing hasn’t created quick fortunes.  If I am going to be completely honest though, it is like hitting the lottery.  The odds just aren’t in your favor.  If you are going to insist on doing it this way, the stories are out there.  Look at what happened to investing in the common stock of several companies that blew the market away since 2009.  If you had managed to invest more than $10000, you would be well on your way to millionaire status after 10 years.  I am not going to pretend that I invested in these companies.  This is a crapshoot.  Identifying these types of stocks, and profiting from them, are not in my skill set.  If this is how you want to build wealth, I suggest you look elsewhere to learn how to do it.

If you want to live out your days with champagne and lobster dinners, you will have to develop a mechanism to generate a high income.  The only ways I know how to do that are to become a high paid professional, or start a business.  The esoteric of options, derivatives, and special stock strategies are beyond me.  In the US, a lot of this success comes from preparation, education and guts.  Read industry trade journals.  Study in school.  Find your passion, and develop a way to make money from it.  In a country that now generates $19 trillion dollars in economic activity, the options are out there, you just have to find one or two, and you can enjoy a life that John Rockefeller couldn’t have imagined.