2 Thoughts You Must Have to Create Wealth

“The stock market is a device for transferring wealth from the impatient to the patient” Warren Buffett

Here we are as Americans, living in a time of unparalleled innovation. Buy a few shares of a great new company and magic can happen. 1)We all have stories of how we sold a stock too soon. We didn’t wait for the magic to play out. We didn’t have faith in our original decision. 2) We have all regretted that there was a stock we didn’t buy. 3) We have held on to stocks that were never going to recover.

Let’s look at three false thoughts that kill returns:

1. I knew I shouldn’t have sold that stock!!

2. I knew that stock was going to go up!!

3. I knew I should have sold that stock!!

   

All three of those are from cognitive (thinking errors.) They are errors because you can rest assured you are not clairvoyant. There are a few things going on here. The main thinking error here is the Fortune Telling Error. You may be in the habit of continually forecasting bad outcomes. Each day your stocks go down, your negative feedback grows. Then you read an article. Oh my! Buy and hold doesn’t work! This time is different! You sell. The positions you sold double or triple over the next two years.

The four most dangerous words in the world: This time it’s different …Nick Murray

Other, crazier, and more costly thinking errors are pretty common. In these areas you somehow think that your actions have the ability to steer the market! “Every time I buy a stock it goes down!” Or, “every time I sell a stock it skyrockets!”

The two thoughts you must have:

Faith-

The thought: Quality equity assets go up in value over time. Do I believe the great equity assets like Nvidia, Microsoft, Costco, McDonalds, Starbucks, etc., will be selling more stuff and making more money in the future? Do I believe that on average the 500 companies in the S&P index will be making more money in the future? It is easy to believe, because it is true. It has never not happened. It simply means that good companies and good real estate will be more valuable over time.

Patience-

The thought: Decades not days. You are investing for your plans 10, 20, 30 or more years out. Just because you buy a stock and it’s down doesn’t mean you were wrong, and buying a stock that is up doesn’t mean you are right. It takes years and even decades for ideas to pan out. Nvidia has been the hottest stock I can think of for the last 10 years. But NVDA has been around since 1993 and went public 35 years ago. There were some good gains for early buyers but in the last 10 years the stock has gone from $5.00 to $800.00. That is a 160 times gain. Your $10,000 investment 10 years ago is now $1.6 million.

You only need to think that a company like Costco, Nvidia, Starbucks, Amazon will have more revenue and earnings and higher dividends in 10 years from now. That’s it.

“Loss in a long term equity portfolio is strictly a human accomplishment.” Nick Murray

It is hard to know when to sell a stock. To make that easier, don’t sell a stock.The only time you have to sell is if you really need the money. In general we want to hold the stock and take income from it by receiving dividends and/or selling a few shares a year. We want to hold it until death. The kids or whoever will get it tax free if in a taxable (non retirement) account.

Our favorite holding period is forever…Warren Buffett

We don’t want to sell as long as the story is intact. That is why it pays to buy a Microsoft, Costco or Proctor and Gamble. You have never had to sell. By collecting dividends it gives you the emotional edge because there will be years (some in a row) with little movement or negative return. With dividends, at least you know you are being paid to wait. Good growth stocks can become good dividend stocks in the long run. META (facebook) just started paying dividends.

Commit to ownership of companies. You own a small piece of the property, equipment, patents, sales, employees, inventory, etc.. And most importantly, you get to earn exactly what the CEO and other big owners earn from their shares. If sales and earnings increase the stock will follow eventually. Stocks don’t go up or down in the long run from anything other than growth in earnings and growth in dividends or lack thereof. Period.

Losing faith in a company is Okay and is important.

You need to check in on your stocks. Peter Lynch says to check them as often as you check your oil. If the basic story has changed you may need to sell. If the company has not executed and is not close to the projections you relied on to buy it, you could or should sell it.

People will continue to not have the will to buy and hold onto great companies. But not you. Now go buy a piece of the greatest companies in the world. Then have the faith and patience to grow wealth.

See you soon,

Craig Verdi

Note: I believe the best and most accessible book ever written on picking stocks was One up on Wall Street by Peter Lynch. It’s an older book, but nothing has changed. It will cost you money not to read it.

Disclosure: This article is not for advice on any stock or other investment. I do not offer advice in articles and mention specific companies only for examples.