Everyone wants to double their money. That sounds pretty nice, doesn't it? The big secret is it's almost assured if you do the right things. The catch is it takes time, patience, and staying the course. Most people don't have the patience and temperament to wait for long periods, especially in the face of market volatility, but those who do can prosper. Here are the two investing tricks you need to master to double your money.
1. Own "inevitable" companies
The first trick is only owning companies that you are virtually certain will be much larger and more profitable in five, 10, and 20 years. That means you'll be focusing on companies that have huge long-term growth opportunities and competitive advantages that are insurmountable for competitors, even over decades. These are companies you'd be comfortable putting one quarter of your net worth into knowing the stock market would close for the next 10 years and you wouldn't be able to sell the stocks. Naturally, this strict criteria narrows your universe of investment-worthy companies substantially.
It also tends to mean you won't be spending your time on companies selling commodity products, turnaround situations, highly indebted companies with uncertain prospects, and most micro caps. Certainly, it's possible to own an "inevitable" micro-cap company, but your odds are worse.
You'll also need to avoid investments that require you to rely on the status quo significantly improving. For example, a common stock pitch includes, "If this company can just improve its profit margins in line with its largest competitor, its stock will be a home run!" While that could happen, it's highly uncertain and unreliable.
To maximize the odds of doubling our money, we need to own companies that are already executing at a world-class level. The only thing these companies need to do to grow enormously over the next decade is more of what they are already doing.
This is the hardest part for most people. Once you've purchased your stake in one of these "inevitable" companies, you can't do anything to interrupt the long-term compounding.
Many market participants think they need to actively trade in order to succeed. The "buy low, sell high" axiom has trained people to think they have to get in and get out of stocks at the right times or prices. But this is untrue.
In fact, most of the time, actively trading ends up seriously harming your financial well-being. For one thing, short-term capital gains tax seriously eats into gains for those who trade. Transaction costs are another factor, although those have come down lately as online brokers tend to offer free or ultra-low-cost trades these days.
But the bigger problem is our own trading decision-making. Stock market volatility tends to make many of us do the wrong thing at the wrong time. Falling stock prices can be unnerving to many and can cause them to sell at any price just to stop the mental anguish. And rising stock prices tend to give us increasing confidence to invest more in increasingly risky situations. In other words, many people tend to buy high and sell low.
In contrast, the owner of a great business that's almost certain to grow over time will almost certainly make money over the long term. Let's say the stock returns 8% per year, which is the average annualized return of the S&P 500 since it adopted 500 stocks in 1957. At that average annual rate, it would take you nine years to double your money. It's possible to double your money more quickly if the company you invest in does particularly well and/or you were able to buy its stock on the cheap side.
While nine years may sound like a long time to some, the sooner you accept that there are no get-rich-quick schemes, the better off you'll be. Once investors lose their shirt taking big risks in the stocks of highly leveraged businesses, low- or average-quality businesses, or while short-term trading, they'll wish they had gone down the path of carefully doubling their money over the long term. Don't learn the hard way by making that mistake. Start taking the long and wise road today.
There's no doubt it takes time, patience, and the right mindset to carefully double your money. But these two tricks will help investors maximize their chances of success.