5 Reasons Most Investors Fail

I've been actively investing money into the market now for the past 15 years. Over that time I've morphed through a number of investing styles -- day-trading, trading based on technical analysis, long-term investing, and in the late 1990s even throwing darts. If I've learned anything over these years, it's that investing in businesses and ideas, not a stock ticker, is where the big gains are to be had.

Source: Ryan Lawler, Wikimedia Commons.

So you can imagine how quickly my jaw dropped to the floor when I revisited a study conducted by Prudential Financial in June 2011 that surveyed 1,000 people and asked them two simple questions: Do you still believe in investing, or have you lost faith in the stock market; and when are you likely to put more money into the stock market (within a year, over a year from now, or never). The answers to these questions are an absolute head-banger! 

What is your current perception of the stock market?

There are still benefits to investing


I've lost faith in the market 58%

Source: Prudential Financial.

When are you likely to put more money into the stock market?

Within a year


Over a year from now




Source: Prudential Financial.

Now keep in mind that when these respondents were surveyed, the stock market had already rebounded a full 100% from its lows! Based on these figures, a full 44% of respondents would have missed out on an additional 26% rally in the broad-based S&P 500 (SNPINDEX: ^GSPC  ) which is higher than the historical annual average return of the stock market. Based on the exact date of June 1, 2011, to June 1, 2012, the 31% who chose to wait a year and try to time the market would have come out slightly ahead -- but if you moved that date forward or backward by just a few days they, too, would have lost out.

Here are five reasons I've learned throughout my years of investing why most investors fail:

  • They're trying to buy stocks, not businesses.
  • They don't understand the concept of compounding gains.
  • They don't feel they have enough money to begin investing.
  • They're too scared to lose their money.
  • They don't know how to get started.

And here are some of the ways you can overcome these flaws.

Buy businesses, not stocks
At The Motley Fool you'll hear us trumpet Warren Buffett, the CEO of Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) a lot -- but with good reason. Warren Buffett invests with the mentality that he's buying into a company that he thinks would succeed if the stock market shut down for the next 10 years. He believes in the management team of every company he buys and focuses on buying businesses with brand and pricing power. You might refer to them as boring investments, but Buffett just sees these businesses as steady sources of cash flow that will increase shareholder value in almost any economic environment.

Therefore, it shouldn't come as a surprise that his holding company, Berkshire Hathaway, which just recently announced the purchase of its 58th subsidiary in NV Energy in May, has outpaced the S&P 500 in 39 of the past 48 years. That's not luck -- that's what happens when you invest in businesses instead of trading stocks.

Invest for the long term and let compounding gains work in your favor
The most abundant mistake often made is when investors attempt to become traders and time the market. While timing the market may work for a short period, it's been shown time and again that long-term compounding gains achieved through share price appreciation and dividends will outpace the nominal gains achieved through day-trading and short-term holds. According to ABC News, and as I noted last month, of the nominal gains achieved by the S&P 500 between 1910 to 2010, dividend yield and dividend growth comprised 90% of all gains.

The Fool's Brian Stoffel put this story in an even easier-to-understand context in February 2012, when, in his fictitious short story he undertook explaining how short-minded investors would have missed out on big gains in Coca-Cola (NYSE: KO  ) versus long-term investors. Had a short-term investor sold holdings after 10 years in Brian's story, he or she may have netted a 2,500% gain, but were the same investor to hold from 1920 through the present day, that person would be up well over 1,000,000%, inclusive of dividends and share price appreciation!

There is no such thing as a wrong amount to invest with
One of the more superfluous rumors that's been floating around for decades is that it's not worth investing in the stock market if you don't have enough money to get started. This is blatantly wrong! If you have $200,000 or $200, it's always in your best interests to put that money to work for you.

Last week, the Fool's macroeconomic guru, Morgan Housel, demonstrated this point to a "T" when he examined the effect of wealth building over time. According to his calculations, a person in his or her 20s could see each dollar saved and invested turn into $10-$18 in future value. Even if that only means $20 per week, that's possibly $200-$360 in future value based on the standard historical returns of the market! 

Source: Rafael Matsunaga, Flickr.

You have to invest to beat inflation
Putting your money under the mattress might preserve your nominal money, but it won't help you over the long run as prices continue to rise and make what money you currently have less valuable. Anyone who hopes to stay ahead of the game needs to invest.

Keep in mind that there are multiple ways of beating inflation and retiring well without risking your entire nest egg. It's perfectly fine to be risk-averse, which is what investment-grade and government-issued bonds are for. However, other ways of investing safely do exist, including buying into basket ETFs that spread your assets, along with the assets of others, among a number of companies. One great idea here would the iShares MSCI USA Minimum Volatility ETF (NYSEMKT: USMV  ) . Composed of 134 large-cap, low-volatility names such as PepsiCo., Johnson & Johnson, and TJ Maxx parent TJX, the iShares Minimum Volatility ETF bears just a 0.15% annual expense, yields slightly better than 2% annually, and is only 78% as volatile as the S&P 500.

Getting started is easier than ever
One of the often forgotten reasons investors fail is that many are simply too overwhelmed or worried about their lack of knowledge to even get started. Luckily for you, the Internet has made the ability to learn about the market and individual companies easier than it's ever been.

The Motley Fool's co-founders (and brothers), David and Tom Gardner, developed the 13 Steps to Investing Foolishly specifically with that skittish investor in mind who's always been curious about investing in the stock market but has been terrified of his or her lack of knowledge or been wary of how to get a foot in the door. My suggestion is, if you're one of the 44% who exclaimed they'd never invest in the market again, one of the 58% who's lost faith in the market, or one of the many on the outside looking in, read over and implement these 13 steps.

Obviously you aren't going to be right with every investment, but all it takes is a few big winners and a lot of time for you to be sitting pretty in an early retirement.

Put plainly, if you don't take the time to invest, you could wind up like the millions of Americans that have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest, that have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.


Read/Post Comments (39) | Recommend This Article (71)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 08, 2013, at 12:51 PM, cattywampus wrote:

    Having the proper attitude and not reacting in an emotional context are most important to me. I found reading the book (Ruling Your World) by Sakyong Mipham Rinpoche helped me to overcome my basic emotional reactions to the stock market.

  • Report this Comment On September 08, 2013, at 1:11 PM, 110254545yy wrote:


    The GREATEST SCAM ever invented by Man is called the stock market.

    An entire Book would not explain why America has made rules to strip it's citizens of their savings and redirect it all to the privileged and well connected.

    Behold the evils of rigged capitalism.

  • Report this Comment On September 08, 2013, at 1:11 PM, tkell31 wrote:

    If it was easy everyone would be doing it. Factor in the most "successful" people at investing are often cheating and it stacks the deck even more against the average person.

    Consider Forbes backed a bunch of reverse merger scams as "best bets," and it gets tough to know who to trust. Cant always trust accounting firms so it makes the filings of newer firms less trustworthy.

    Safest bet is to pick stable dividend stocks and sell put and covered calls to increase the returns slightly.

  • Report this Comment On September 08, 2013, at 1:25 PM, Insighter1 wrote:

    The problem for most folks is determining which companies and sectors to invest in for the future, a factor glossed over lightly here.

  • Report this Comment On September 08, 2013, at 1:36 PM, goldjsims wrote:

    There is alway money to be made in the market, I made 38% in August and my trick was looking at the most volatile stocks charts and then if they looked good I would invest, right now the best thing to buy is DUST

  • Report this Comment On September 08, 2013, at 1:48 PM, bornlastnight wrote:

    Nevada Energy, first order of business since berkshire:

    just submitted request to the Public Utilities Commission of Nevada.

    NV Energy proposes to increase the average monthly residential bill by an estimate of $1.48, or 1.8 percent for Northern Nevada electric customers. NV Energy proposes to increase the monthly residential electric service charge from $9.25 to $15, according to an official with PUCN.

    For Northern Nevada gas customers, NV Energy proposes to increase the average monthly residential bill an estimated $3.95, or 11.08 percent. NV Energy proposes to increase the monthly residential gas service charge from $8.50 to $10. The average system impact for all customer classes is an estimated 11.40 percent increase in rates, according to an official with PUCN.

    Buy the business and screw everyone to pay for it, the american way.

  • Report this Comment On September 09, 2013, at 10:34 AM, Mathman6577 wrote:

    Long term buy and hold of stocks of fundamentally strong companies works no matter what the economic conditions are. There are no get rich quick schemes and the market is not rigged against the retail investor.

  • Report this Comment On September 09, 2013, at 12:03 PM, KombatKarl wrote:

    "If it was easy everyone would be doing it."

    But it is easy. Just invest in an index fund and you're set. With the fees you probably won't beat the market, but you'll still be close. Nobody lost money long-term investing in index funds.

  • Report this Comment On September 09, 2013, at 5:52 PM, dgmennie wrote:

    In discussing Foolish attempts to extract wealth from the stock market, I am reminded of The Second Law of Thermodynamics, which states that "in all energy exchanges, if no energy enters or leaves the system, the potential energy of the state will always be less than that of the initial state."

    So, for one to aquire continuous investment wealth, especially the inflation-beating kind, it must be extracted from others (many others) who are simultaneously losing wealth.

    Once someone is fully invested long term in any game or scheme that cannot possibly reward all players, they must always remember the Second Law of Thermodynamics in terms that everyone can understand:

    You cannot win

    You cannot break even

    You must play the game

    When you also consider that retail stock buyers are also up against scoundrels with inside information and other methods of racking in coin for themselves, the end result for MOST INVESTORS should be obvious.

  • Report this Comment On September 09, 2013, at 6:25 PM, Jrod81 wrote:

    "The most powerful force in the universe is compound interest." - Albert Einstein

    Thermodynamics holds true only for a finite, fixed system, such as energy in the universe. In the economy, wealth and value are genuinely created by a variety of means, such as through advancement, intellectual property, and the globalization of information. Everyone really can win. There is a completely different (and higher) amount of value in the economy today than their was 30 years ago. Universe: still holding steady in amount of energy.

    As for me, I don't need to beat those that try to cheat the game, I just need to use the information that I have to help achieve my own financial goals, and I can't imagine getting there without the stock market, investing in quality companies, and leveraging time to compound my dividends.

    Great article, Sean, and thank you for calling out the main reasons for people avoiding the market, and trying to inspire confidence in ways to invest Foolishly. Loss aversion is an extremely powerful motivator, and the more people have self awareness of their biases, the better.

    Personally, I'm looking forward to seeing where my portfolio is at in 35 years when I retire.

  • Report this Comment On September 09, 2013, at 6:58 PM, cavrad wrote:

    Great article, Sean, but let's cut to the chase: what are this year's UL300? ;)

  • Report this Comment On September 09, 2013, at 8:42 PM, phrush wrote:

    The reason that most investors fail is simple, and behavioral economics tells us the basis. Investing is not hard, but beating the market is nearly impossible. Yes it is true that buying great companies is probably the only way you can do it, but first, you have to buy at the right price, and then you have to have the discipline to keep watch on your investments, and hold or sell them at the right time. Never respond to the events of the moment, but rationally decide whether the investment remains sound and sell or hold accordingly. But our cognitive biases and emotions combine with our irrational responses to risk to make it impossible for all but the most steely nerved few to do it right. Fewer than 5% of professional can maintain above market performance over a 5 year period. And it is not clear that - with the exception of a few greats like Warren Buffett - the percentage who maintain such performance is actually at all greater than what we would expect from pure randomness.

    It is his ability to transcend the behavioral and attitudinal limitations of common investors that makes Warren Buffett so amazing. If you think you can be one who can match that degree of steely resolve combined with outstanding insight and analytic ability (i.e., the next Warren Buffet), good luck to you.

  • Report this Comment On September 10, 2013, at 12:21 AM, lowmaple wrote:

    We individual investors do not and should not have to beat the markets like the professionals do. We have no obligation to anyone except ourselves so we don.t have to overtrade for short term gains. Now we can try that but as you say most professionals don't. Just hold on through the flash crashes etc.

  • Report this Comment On September 10, 2013, at 1:20 AM, observerbob2013 wrote:

    I started investing when I was 12 years old with money I had earned in an after-school job. After more than 50 years of investing the one thing I have learned is never listen to the professionals.

    Biuffett is corect that you shold only invest in companies you believe to be well managed and in a satisfactory market but that is not enough on its own because times and management change.

    Sure it is always possib le to look at the success stories like Coke but even a Coke can become a Sears when the world changes.

    Investing is the same as any business you must be willing to spend your own time and expertise to monitor your investments. Listen to EVERYONE but make your OWN decisions based on your judgement.

    Nobody is always correct and no company is always good. Great companies lose great people and go from rooster to feather duster in the blink of an eye a good example is Nokia which simply lost the plot when smart phones came on the scene.

    Always be willing to trade. If you have a good profit and believe the market is over-valued, take it and set a re-entry point. If you are wrong you still have money in the pocket, if you are right your returns are far greater.

    Always remember nothing is forever.

  • Report this Comment On September 10, 2013, at 7:55 AM, ErasmusBDragon wrote:

    I think many of the posters here understand the basic flaw in the response "I've lost faith in the market." If you're investment strategy is faith-based, you may as well do your investing at the tables in Las Vegas. Of course the market is "rigged," and those with more money, better information, no ethical scruples, etc. will make more than the average individual investor. The real question for the individual is, "Do I have a better chance achieving my goals by investing in stocks, or doing something else with my money?" This requires that you think about your goals and understand the dynamics of individual companies, not relying on blind faith.

  • Report this Comment On September 10, 2013, at 8:55 AM, theeasterbunny2 wrote:

    Goos points actually. I believe that if you listen to the "pros" on Wail Street (sic) you can get clipped. Do your homework and don't take the easy way out! It is YOUR money. I would bet that most people take more time researching which car to buy than where to invest ther hard earned momney. Good Luck !

  • Report this Comment On September 11, 2013, at 8:03 AM, mikecart1 wrote:

    Most investors fail because at some point they get it in their head that buying cheaply priced stocks in terms of actual share price means you are getting a bargain and that stocks priced above $100/share are a waste of time to buy because "they are already too high" or because "a stock under $10/share has more chance to double or triple than a stock over $100/share".

    It makes no sense to me.

  • Report this Comment On September 11, 2013, at 9:10 AM, Wally3851 wrote:

    Most people are too greedy...I have reserved myself to be happy with 20-25% profit a year which is fairly easy to do with some multiple trades...go to a discount broker and pay no more than $9.99 per trade and some as low as $4.99 but with conditions.

  • Report this Comment On September 11, 2013, at 9:31 AM, daveandrae wrote:

    Investing is simple? yes. Far simpler than most people realize.

    Investing is easy? no.

    Not even remotely.

    Finding a good stock on SALE is like finding a good woman that likes YOU. Once you've found that right one, and all it takes is one, you won't want a divorce.

  • Report this Comment On September 11, 2013, at 6:44 PM, Lucaskasan wrote:

    This is not an article; this is an advertisement masquerading as an article. It contains a number of deceptive statements, some of which were pointed out in earlier comments. Furthermore, this ad refers to previous bonafide articles (such as the KO article) but without the qualifiers present in the original article and its accompanying comments. Motley Fools loses credibility when they mix education with deception. Sadly, some of the comments on this ad make it clear that many Motley Fool readers cannot tell the difference between an informative article and an ad.

  • Report this Comment On September 11, 2013, at 7:34 PM, LotinElite wrote:

    @dgmennie You could not be more wrong. There is no other way to say it.

    The stock market, like the economy in general, is not a zero sum game. So your 2nd law of thermodynamics analogy is complete wrong because unlike matter or energy, wealth can be created.

    It's amazing to me that despite an almost continually rising standard of living and GDP, nearly everyone seems to think that it is a zero sum game. It's probably a byproduct of the class warfare rhetoric politicians use to get the ignorant to vote for them.

  • Report this Comment On September 11, 2013, at 7:56 PM, awallejr wrote:

    I don't try to beat anyone when I invest. I only need to answer to myself. My goal is to create a large enough income stream to provide for me when I retire completely.

    If you are shooting for major wealth, then don't listen to any investing pundit. Search out that fledgling new company that possesses a potentially explosive "product" and invest heavily into it.

    Do this when you are young while you have time to recover from losses. Do not diversify. All your billionaires did not diversify. Not even Buffett.

  • Report this Comment On September 11, 2013, at 11:42 PM, phexac wrote:

    ".I have reserved myself to be happy with 20-25% profit a year which is fairly easy to do with some multiple trades."

    Just the humble 20%-25% per year, which is easy to do, huh?

  • Report this Comment On September 12, 2013, at 1:10 AM, Tuxster12345 wrote:

    You consider trading and technical analysis "investing styles"?


    You really do?


  • Report this Comment On September 12, 2013, at 10:30 AM, jlclayton wrote:

    It amazes me how many people talk about how the stock market is rigged, it is designed to strip citizens of their money, etc., etc. The fact is that most people don't take the time to actually learn about how the market works and won't listen to those who are successful, such as Warren Buffett. They would rather get their information from some pundit on TV or from some friend of a friend who "made a fortune on XYZ stock in 2 months!" I'm speaking as someone who has been there, done that, then started learning what I needed to know.

    Investing takes time to learn, mistakes will be made, money will be lost, and returns will be steady, not get rich quick. For those who do not want to learn how to invest in individual stocks, they should still take the time to learn the actual facts on saving, compounding, and basic index funds that follow the market as a whole. Education and experience, instead of blaming others and railing against the system, will go a long way toward a person's success in life, financial and otherwise.

  • Report this Comment On September 12, 2013, at 11:49 AM, banmate7 wrote:

    Investing is easy if you commit yourself to certain principles. There are basically 2 ways to invest for the average person:

    1) Dollar cost average into low cost index funds.

    * do not give your money to actively managed funds.

    * actively managed funds charge expensive fees & typically under perform indices over long horizons.

    * many managers chase growth, buying companies at absurd valuations. They effectively become bag holders, transferring wealth to the smart money.

    * I believe no 10 year period of history in the US has ever featured < 9% annual gains. Time is important here.

    2) Value investing: the best way to invest.

    * posters here mentioning Buffett & Graham are spot on.

    * use value metrics to assess a company. PE, PB, PG, cash flow, balance sheets, & income statements. Do a final gut check if the metrics score value, then buy in heavy.

    * over time, under valued companies normalize back to fair valuation. When the opposite happens and they are irrationally valued, you have an opportunity to sell.

    * however, I tend to hold forever & reinvest dividends.

    I've handily beaten indices using value investing. It works. It defeats the short term market manipulation of institutions. It circumvents foolish fund managers who are basically abusing your money.

    I've managed to turn a $40 - $60k basis into $350 $400k since about 2002. Prior to that, I was in index funds, but gradually turned to value investing. I expect to double my money every 4 - 6 years.

  • Report this Comment On September 12, 2013, at 2:10 PM, bestinsiderinfo wrote:

    Making money requires several things:

    Money to start with, if you don't have more than a year's worth of salary stashed away, don't play daytrader. You could lose your job anyday.

    Insider info. Don't believe me, then you've never worked in big business..ever. I used to do the investments and financials (not at the same time) for a multibillion dollar company. Guess what? Found out the bigwigs were raiding the cookie jar a year before everyone else knew. Left that sinking ship.

    Patience. If you are going to look at volatile stocks and buy and sell within a week, you are not a true investor. You are gambling. Research the company, then pick a set of investments and play invest keeping track of your success. When you are averaging above the index, then you invest.

    Think of tomorrow. In this job market, you may very well lose your job and be out of work for months to years. Spend your money wisely and save as much as you can.

    Remember, financials can always be manipulated. My coworkers were forced to fix the sheets at this company, taking millions in bad debts and posting them as receivables (due to be collected in 90 days--yeah more like never gonna happen), hiding losses. If they did, others do it. See Rite Aid, Enron etc.

    See banmate7's advice.

  • Report this Comment On September 12, 2013, at 4:05 PM, hbofbyu wrote:

    My portfolio in 2001:








    Lost my shirt on every damn one of these great "businesses".

  • Report this Comment On September 12, 2013, at 6:20 PM, banmate7 wrote:


    We've been in a secular bear market since 1999, when the dot com crash occurred. Valuations were extreme back then, even with a company like CISCO. You still wouldn't have made your money back.

    However, value investors would simply not have bought even blue chips at high valuations. However, after the crashes of 1999 and 2008, value investors picked up the same companies at cheap PE, PB, even PG, with accompanying great financials. In fact, CISCO doubled in the last 2 years.

    Value should be one's buy signal.

  • Report this Comment On September 12, 2013, at 7:26 PM, jlclayton wrote:


    My 401k portfolio pretty much looked the same as yours in 2001, different companies but the same type of mix. The 30k portfolio that I had built after starting a new job went down to 4k, and I felt like the biggest failure in the world at investing.

    However, I knew that I wanted my money to work for me and that the only way to retire the way I wanted would be to learn how to invest wisely. So I started researching some of the books and articles that successful investors wrote. By 2007 the portfolio was up to 75k, but then the market downfall reduced it back to 32k. I had started with the MF in 2005 and tried to adhere to the principles of buy and hold, only selling stocks that I didn't have a good thesis for holding onto and adding to the positions of stocks that I had confidence in as their prices went down.

    Thanks to the common sense approach to investing that I learned at MF and spending the time to become familiar with the companies of the stocks I was interested in, my portfolio today is now just over 200k.

    Don't get discouraged, get determined--if I can do it, I know anyone can!

  • Report this Comment On September 13, 2013, at 1:51 PM, dsciola wrote:

    Wow lots of noise here among a few nuggets...

    I'm curious whether the above survey can serve as a thorough contrarian indicator. per the above article, the market has experienced quite a run-up since its publishing in June...up nearly 27% since


    What if this survey was replicated today? Is there a June 2013 survey and if so, have the ppl turned from bears to bulls?

    My hunch is most of these folks who completed this survey dont know much, if anything about markets, p/e's, value, etc. Thus when they turn bullish, the party is just about to end, and it may be time to raise cash.

    " In the winter of 1928, Joe Kennedy decided to stop to have his shoes shined before he started his day's work at the office. When the boy finished, he offered Kennedy a stock tip: "Buy Hindenburg." Kennedy soon sold off his stocks, thinking:

    “”You know it's time to sell when shoeshine boys give you stock tips. This bull market is over.


    A timely move considering that the stock market would soon resemble the fate of the airship Hindenburg itself"

    My 2c.


  • Report this Comment On September 14, 2013, at 3:12 AM, Sunny7039 wrote:

    You're right -- this is definitely advertising. Anyone who writes as though past returns are a reliable guide to the future, with no caveats, is simply misleading you. These vignettes about what someone else did and what they have are also designed to stoke your envy.

    People who had a 2-year cash cushion in 2008 didn't have to sell any stocks at distressed prices. People who had a 3-month cushion or less probably did. In fact, many of them ended up raiding their 401(k)s.

    The old-time advisors where I live (a major city), who remembered the Depression as well as the 1987 crash, advised all their clients, especially the millionaires, to keep two years of minimum living expenses in cash and cash equivalents.

    If you don't do that, you don't belong in the market with anything but your 401(k), IRA, and similar retirement accounts -- because you DON'T HAVE ENOUGH MONEY to invest. Of course you could always go buy into a mutual fund or a DRP with what little you've saved, but you'll very likely need to pull out your investments just when everything tanks, rather than when things are going well.

  • Report this Comment On September 14, 2013, at 9:27 PM, pastabelly wrote:

    One point on investing in stocks that I don't see very often is the zero factor. Since the price cannot go below zero you can only lose what you put in. There is no such limit on how high the price may go or how much you may gain.

  • Report this Comment On September 17, 2013, at 6:58 PM, bobbydig wrote:

    Motley Fool is a scam site. Investor beware

  • Report this Comment On September 18, 2013, at 5:07 AM, Marthawhite wrote:

    All investing involves risk. But there's a big difference between smart investing and gambling. Trading a few stocks without knowing what you’re doing is gambling. Diligently setting aside money, putting it the best stocks or funds for your goals, and leaving it put for the long run. That’s investing. In order to search for best stocks, you may visit

  • Report this Comment On September 18, 2013, at 6:03 PM, CHill8008 wrote:

    As the author alludes to in the first paragraph with his investing experience; learning is a product of failing (look at his evolving investing styles over the years). Just fail within your means... and not beating the market is not bad, it is almost impossible, loosing to inflation is bad, however.

    And the second law of thermodynamics!!? I think it's been pointed out already, but the stupidity of application here needs to be expounded: the market is not finite. Wealth is informational or combinatorial, a cognitive process. Wealth is creative and generative, bounded only by human mental processes, so functionally unbounded. Getting wealthier no more deprives someone else of wealth than writing a novel deprives another of poetry.

  • Report this Comment On September 21, 2013, at 3:13 AM, drose20 wrote:

    Still wondering how compounding works for stocks without dividends? Can anyone answer that for me?

  • Report this Comment On September 23, 2013, at 5:01 PM, RallyPac wrote:

    drose20 - Yes, there are a couple of ways: firstly is the stock split where the price of a share goes higher than the company wants it to be. They issue you another share so that the value of each is only about 50%. You can anticipate that both of your shares will increase in value quicker than if it stayed expensive. Secondly, many companies grow by buying up the competition. If a smaller firm which cannot afford to pay quarterly dividends is bought by a behemoth, the purchase price is typically higher than the market price. If you own the smaller company you can usually come out out pretty good. If the behemoth pays quarterly dividends you get yours if you keep the new stock that you are issued. Also, tax changes last year brought about the need to spend excess revenues and some companies paid out large one-time bonus dividends before the end of the year. That was a nice surprise!

  • Report this Comment On September 23, 2013, at 8:22 PM, daveandrae wrote:

    Drose 20 wrote -

    "Still wondering how compounding works for stocks without dividends? Can anyone answer that for me?'

    The simplest way to explain how compounding works without dividends would be if you and I started a business together. Let's keep it simple and say we invested 10,000 bucks or 5 grand each into a landscaping business.

    Let's also say after expenses we pocket 2300 bucks in year one on our investment.

    2300/10,000 = 23% return

    Now, Instead of paying ourselves a "dividend" from the 2300, we take all our profit money, reinvest it back into the business, and buy another mower.

    Now, in year two, we have 12,300 worth of assets. (2300 + 10,000) Assuming we generate another 23% return, year two will produce a 2,829 dollar return off of our 12,300 asset base.

    2,829/12,300 = 23%

    Instead of paying ourselves a "dividend" from the $2829, we reinvest that money back into the business and purchase even more assets.

    Now we have 12300 + 2829 = 15,129 worth of assets.

    Assuming we generate another 23% return, in year three we will will have a $3479.67 dollar profit.

    3479.67/15,129 = 23%

    Instead of paying ourselves a "dividend" from the 3479.67, we reinvest that money back into the business and buy even more assets, generating even more earnings.

    Now go back to year one and imagine what our profit would be like in year three if had paid ourselves a "dividend" from the 2300 instead of reinvesting it? This is why an investor should DE-emphasize the dividend.

    Put simply, if I am still generating a 23% annual return off of what is now a $500,000 asset base in year 20 of my landscaping business who cares whether or not I make ends meet by working at McDonalds part time.

    Hope this helps :)

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