I started thinking recently about how I would pass down stock investments to my children when I pass away. It’s one thing to just give them the stocks, but there would be little stopping them from just selling those stocks, cashing out, and blowing all of that money on cars and vacations. The real gift that I would want to pass down is my mindset for saving and investing in quality companies. I also couldn’t expect them to read everything I’ve ever written about stocks either, so I thought it would be a good challenge to try to get everything down to a single article. So this is my attempt to pass down important chunks of knowledge to accompany the portfolio.
“1 dollar every month is better than 50 dollars now”
I believe this concept to be the cornerstone to building wealth and living a secure and enjoyable life. A set amount of money being paid or received is only ever going to be that amount of money, but money moving at a regular rate has the potential to become far more over a long enough timeline. If I receive 1 dollar every month for 5 years, I’ve received a total of 60 dollars, and will keep making more every month. This also means that something that costs me $1 per month will exceed the cost of a $50 one time payment after 4 years and 2 months.
Another way to look at this concept is renting versus owning. If you plan on owning something long enough that the cost of renting exceeds the one time cost of ownership, then it is a better choice to own it. The best thing you can do is own an asset that other people want to rent, so you pay once, and they keep paying you forever.
“The value of stocks is not the price they can be sold for, but the income they produce”
This goes back to concept #1. Owning dividend paying stocks gives you free money for the rest of your life, with no limit. In fact, the amount of money you receive from the stocks you own will probably increase each year. The best companies increase their dividend payments every year. Selling a stock for a one time payout is basically robbing yourself of all the future dividend payments you would otherwise receive. The only time a stock should be sold is if this income is going to be lower this year, than it was last year (disregarding any special 1 time dividends or splits).
“If you can’t explain a company’s business in 2 sentences, you probably don’t understand it and probably shouldn’t buy it”
One of the biggest mistakes an investor can make is buying shares of a company without any knowledge of how that company makes money. This doesn’t mean knowing all of the details of Coca-Cola’s distribution channels. It means knowing the products or services that a company sells and knowing the general demand for that product or service. People everywhere drink Coca-cola soft drinks, and they probably will continue to do so for the foreseeable future.
“Buying a stock in the hopes that its price will increase over any period of time shorter than 2 years is gambling. Don’t gamble your money”
This is pretty self-explanatory. Gambling is not a reliable way to build wealth, and buying a stock with the intention of selling it later is gambling. Instead, focus on buying shares of companies that are going to keep growing their business and profits and share those profits with investors. This is the difference between buying some apples with the intent of selling them tomorrow and buying them to plant trees that will provide you with apples for life.
Without getting into the highly technical concepts with which I use to evaluate my investments, I think these values could help set someone along a path to financial wisdom.
And of course, my favorite phrase: “Buy Smart, Never Sell”