Why You're Not Rich

Pull up a chair, friend. It's time for a heart-to-heart. You see, I want to explain why you're not rich.

You know you want to be rich -- heck, who doesn't? But your bank accounts don't add up to holding seven figures, unless you count the two after the decimal point. So time goes by, and year after year your photo isn't published in Forbes magazine's annual ranking of the richest Americans. What went wrong?

Well, there are many possible reasons, depending on your situation. So I'll focus on why I am not rich. You'll learn about your own condition as you read about mine.

Let us count the reasons ...
So why am I still toiling for a living instead of raising pot-bellied pigs or focusing on my passion for the javelin? Could be because:

• I'm impatient. I want big spikes in my net worth from month to month and year to year. This impulse is one I can keep in check but every now and then, I buy shares of a company that seems poised to surge, often for rather speculative reasons.
  For example, I bought shares of Martha Stewart Living Omnimedia (NYSE:MSO) in 2005 hoping to make a quick buck, and I ended up losing money.
• I'm lazy and irresponsible. This one hurts to admit, but it's true. Many times I've bought into companies I didn't investigate sufficiently. I didn't have a good handle on how they make their money. This, the business model, is important to understand about a company.
  Consider Amazon.com (NASDAQ:AMZN) and Barnes & Noble (NYSE:BKS), for example. On the surface, they both sell books. But Barnes & Noble has a much heavier business model, running nearly 800 bricks-and-mortar stores. Amazon operates no stores at all; it holds items in inventory until shipping them out. It also sells a much larger variety of items than Barnes & Noble. eBay (NASDAQ:EBAY) has an even lighter business model because it holds no wares in inventory. It takes a cut of the transactions it administers. When you add all this together, you see why these companies can perform very differently, even though they have similar traits.
• I overpay. Sometimes, even though I invested in a top-notch company, I may have done so at an inflated price. If so, I shouldn't expect great growth in the near future. In fact, it's just as likely that the stock will slump for a while -- maybe years. A stock's price matters. A lot. Seek out undervalued companies.
• I'm greedy. Ignoring the connection between a company's current stock price and its intrinsic value, I've held onto stocks after they've surpassed their fair value, hoping to make just a few more dollars off them. This has often ended badly, as stocks tend to move in the direction of their fair value. If you make what you expected to make on a stock, it can be smart to sell and move on. If the company is growing steadily and you can see yourself holding on for decades, then do so, but keep tabs on its progress.
• I'm disrespectful. I've disrespected things like dividends. According to Jeremy Siegel's book, The Future for Investors, 97% of what stocks have returned historically has come from reinvesting dividends, while only 3% came from capital gains.

What to do now
Could any of these reasons explain why you are not rich? I thought so. What do you do now?

Well, change your ways! I've changed many of mine. I now invest a substantial chunk of my money in solid mutual funds. I seek established, dividend-paying blue-chip companies. I trade infrequently, and speculate much less than I used to. I look for undervalued companies.

One way to find undervalued firms is by screening for them. For example, I recently ran a screen at Yahoo! Finance for companies with net profit margins of at least 10%, trailing-five-year earnings growth rates of at least 10%, and price-to-earnings (P/E) ratios of 20 or less. Here are some companies that popped up:

If you don't have the time to scour the stock market, I invite you to do what I frequently do -- tap the expertise of those who do. Consider taking advantage of a free, no-obligation trial of our Motley Fool Inside Value newsletter for 30 days. With it, you'll have full access to all past issues, and you can read in detail about every recommendation.