The Simple Way to Make Money on Stocks

Much has been said about how to make money from stocks, but one paper reveals how great wisdom from Warren Buffett is something we all need to do.

Aug 18, 2014 at 8:00AM


Looking for how to make money in the stock market? A new paper reveals there's one easy way.

And it turns out it's one thing Warren Buffett has admitted he does almost every day.

The importance of saving and investing
According to a recent paper released by the National Bureau of Economic Research, or NBER, entitled Financial Knowledge and 401(k) Investment Performance, now, more than ever, the ability for an individual American to properly save and invest is critical.


Source: Flickr / 401(K) 2013

The paper notes that as a result of the changes in how employers contribute to employee retirement accounts -- pension plans have become less common and things like 401(K) accounts, which require more decisions from individuals, have grown -- "the ability to invest wisely and earn better returns will therefore be increasingly critical for national retirement well-being in an aging world."

In other words, there has never been a time quite like today when an individual's responsibility to manage their retirement has been so important.

And after pouring through the retirement accounts of more than 22,000 individuals and surveying thousands, the study found there is in fact one thing that can ensure success is had in investing.

The key to success
The answer? The paper went on to say:

Our results show that more financially knowledgeable investors earn substantially better risk-adjusted investment returns. Specifically, expected risk- adjusted annual returns are 130 basis points higher for the most financially literate investors, as compared to the financially unsophisticated. This advantage could have important implications over a lifetime of saving for retirement, and it might help account for large differences in retirement wealth in the population.

In other words, the more an individual knew about finance, the more they earned from their investments. And to put that into context, the difference of 130 basis points -- or 1.3% -- annually may not sound like a lot, but it can make a monumental difference over the course of a career.

A powerful example
Consider the examples of two 25-year-olds, Jerry and Larry, who each made $40,000.

They started work at the same time, and they each saved 5% of their income into 401(K) plans where their 5% contribution was matched by their employer. So they put away $2,000 of their own money in the first year into their 401(K) plan and the employer added another $2,000 into the account.

Let's also say their salary grew by 3.5% each year, and they worked for 40 years before they retired. As a result, they would've built up more than $350,000 thanks to their savings and their employer's contribution. Not bad!

But of course, it would be one of the most dangerous things to not invest those savings and let it just sit in an account.

So they both invested, but Larry diligently tried to become more educated about finance. But regrettably, Jerry didn't. As a result, Jerry earned 7.5% each year from his investing, but as the study would suggest, Larry was able to boost his return by 1.3%, netting him 8.8% annually.

So what would that mean over the course of 40 years? Words don't do it justice:

The Difference In Retirement From Learning
Source: Author Calculations. 

Despite identical savings put in, when they retired, Larry would have nearly $650,000 more than Jerry thanks to the higher returns.

And this is even despite the fact the study notes, "our estimates of the positive association between financial knowledge and investment returns may be understated." Meaning that difference could be even higher.

The Warren Buffett wisdom
Warren Buffett is undoubtedly one of the greatest investors of all time. From 1965 to 2013 the book value of his firm -- Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) -- has grown by 19.7% each year, whereas the S&P 500 delivered a return of 9.8%.

That difference of nearly 10% each year means $100 in his firm nearly 50 years ago would be worth $693,518 today, whereas $100 placed in the S&P 500 would be worth $9,841.That is all to say, beating the market is a gross understatement. 

But he once said: 

I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business. I do it because I like this kind of life.

He is clearly one who understands the value of reading and thinking, which leads to better learning and investing.

At times we can think the only way to make money is to have money, yet we must see, when it comes to investing, the key to success isn't the money we have, but understanding what to do with it.

Warren Buffett: This new technology is a "real threat"
Speaking of Warren Buffett, at his company's annual meeting, he admitted this emerging technology is threatening his biggest cash-cow. But only a few investors are embracing this new market which experts say will be worth over $2 trillion. Find out how you learn about how to cash in on this technology before the crowd catches on, by jumping onto one company that could get you the biggest piece of the action. Click here to access a FREE investor alert on the company we're calling the "brains behind" the technology.

Patrick Morris owns shares of Berkshire Hathaway. The Motley Fool recommends Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers