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I'm not trying to sell you a get-rich-quick scheme, and unlike those infomercials that dominate the airwaves after midnight, I won't promise you that getting your net worth where you want it to be will be easy. But what I will do is show you a different way of thinking about money -- one that could transform your investing life forever.
The true cost of spending
The personal finance website Mint.com ran an amusing infographic recently. It took a number of popular products from the past and asked a simple hypothetical question: What would have happened if instead of buying those products, you'd spent that money to buy shares of the companies that made them?
As you'd expect, the results differed greatly. Spending $20,000 on a Taurus in 1990 would have cost you more than $100,000 had you instead took that cash and invested it in Ford stock. On the other hand, if you'd invested the $150 you'd have spent on CDs at Circuit City in that retailer's stock, then you'd be sitting on a big goose egg right now, thanks to its having declared bankruptcy.
Basically, the strategy of investing in what you spend money on takes the philosophy of legendary investor Peter Lynch a step further. Rather than simply buying what you know, diverting some of your spending toward stocks of companies that make the products you love serves two purposes: It boosts your overall saving, and it helps you select investments that both matter to you and presumably do business in a positive way.
What you learn
Saving and investing more doesn't just set the gears in motion toward making you richer. In the process, you can also learn some valuable investing lessons. Here are just a few of them:
1. Great products don't always make great stocks.
Just because a company makes a product you really like doesn't necessarily mean that it's going to turn into a great investment for you. Since you have to take other factors into account in investing, such as valuation and growth potential, focusing solely on your current satisfaction with a company's products can get you into trouble.
That's exactly the trap that many investors fell into 10 years ago. Microsoft (Nasdaq: MSFT ) , for instance, was on top of the world in operating systems and business software, and its Web browser was beginning to dominate rival Netscape. Amgen (Nasdaq: AMGN ) had ridden the success of its landmark Epogen anemia drug to new heights. And Cisco Systems (Nasdaq: CSCO ) was establishing itself as the backbone of the Internet. Yet even though those products have endured -- they're still in great demand today -- none of those stocks has lived up to investors' hopes, all having lost money since 2000.
2. Investing pays off again and again.
Most of the time, when you buy stuff, you gradually lose interest in it. Either it wears out, goes out of style, or gets replaced by some brighter, shinier new replacement. Try to resell that stuff, and you'll usually be lucky to get a fraction of what you paid for it.
Investments, though, often pay you to hang onto them. Once you drink a Coke, it's gone forever, but Coca-Cola (NYSE: KO ) stock pays you $1.76 a share each and every year in dividends to do with what you will. AT&T (NYSE: T ) and Verizon (NYSE: VZ ) count on your desire to upgrade your smartphones every year or two -- along with the juicy new contracts they come with -- but their investors get roughly $6 a year for every $100 they put into shares. That's the direction you want the money flowing in the future.
3. Bust a bad habit and get rich.
In some cases, getting on the saving bandwagon can also become a motivating force to improve some other aspect of your life. For instance, I knew someone who was trying to quit smoking and came up with a unique method: every month, she'd take the $100 or so that she would have spent on cigarettes and put it into Altria Group (NYSE: MO ) stock. Not only has that turned out to be lucrative from an investing standpoint, but it also gives her new insight into how the company markets its products and serves as a constant reminder of how far she's come since breaking the habit.
Start getting rich today
So as the holiday shopping season starts up, take a moment before you break the bank to consider whether spending a bunch of money on stuff is really the best use for your cash. What you might conclude is that a few shares of stock could go a lot further toward making you truly happy in the long run.
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