Investing is a skill that, like any other, requires patience and practice. Given enough time, anyone can learn to evaluate businesses and pick good stocks, and anyone can apply that knowledge to become a stock market millionaire.
Let me be clear: Readers looking for get-rich-quick schemes will not find any here. Moneymaking strategies that seem too good to be true usually are, and dabbling in day trading often ends in disaster. The truth is the path to stock market riches is paved with boring but sensible decisions.
Here are three secrets of stock market millionaires.
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1. Stock market millionaires make ordinary, easy decisions like buying an S&P 500 index fund
Warren Buffett is one of the most successful investors in American history. Since he took control of Berkshire Hathaway in 1965, the stock has compounded twice as fast as the S&P 500, and Buffett himself has amassed a personal fortune that exceeds $110 billion. That success is a product of his patient, value-oriented investment philosophy.
Contrary to popular misconception, investors need neither moonshot stocks nor a profound intellect to become stock market millionaires. "It is not necessary to do extraordinary things to get extraordinary results," according to Buffett. "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ."
Instead, Buffett believes investors can make millions by consistently doing ordinary, everyday things very well. That means regularly investing money in competitively advantaged businesses that trade at reasonable valuations and holding those stocks for as long as the underlying businesses remain attractive.
Alternatively, Buffett has often recommended an S&P 500 index fund as the best option for many investors, simply because most people are unwilling to do the requisite research when buying individual stocks. That strategy has "boring" written all over it, but it works. The S&P 500 returned 10.16% annually over the last three decades. At that pace, $100 invested weekly would have grown into $1 million.
2. Stock market millionaires abstain from market timing in favor of long-term thinking
Peter Lynch managed the Magellan Fund at Fidelity between 1977 and 1990. He earned a return of 29.2% annually during that 13-year stint, more than doubling the performance of the S&P 500. So successful was Lynch that he retired at age 46 and his net worth is currently estimated at $450 million.
Lynch had a simple philosophy: Investors should only buy a stock when they understand the business, and only when they have enough conviction to hold the stock in all market environments. Drawdowns are unavoidable, and even the best investors lose money. "When I ran Magellan Fund, the market had nine declines of 10 percent or more," Lynch once noted. "I had a perfect record. All nine times, my fund went down."
Even so, he was pointedly opposed to market-timing strategies. "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves," according to Lynch. "People who exit the stock market to avoid a decline are odds-on favorites to miss the next rally."
Lynch became a stock market millionaire many times over, and he did so despite being invested during multiple corrections, bear markets, and recessions. His success is proof that a buy-and-hold strategy has merit.
3. Stock market millionaires focus on valuation, and they buy stocks when the market declines
Shelby Davis lacks the renown of Buffett and Lynch, but his accomplishments as an investor are no less impressive. In fact, Davis may be the more inspirational figure. Whereas Buffett bought his first stock at age 11, and Lynch started investing as a college student, Davis didn't put a dime into the market until age 38. Yet he achieved exceptional results.
Specifically, Davis put $50,000 into the stock market in 1947. He bought reasonably priced stocks (especially insurance stocks) and invested with a long-term mindset. His portfolio was worth $900 million when he died in 1994, meaning his money compounded at 23% annually over 47 years.
Davis achieved those results despite battling eight bear markets and eight recessions. In fact, he viewed those drawdowns as buying opportunities. "You make most of your money in a bear market, you just don't realize it at the time," he once said. "A down market lets you buy more shares in great companies at favorable prices."
Additionally, Davis paid a great deal of attention to valuation, because "no business is attractive at any price." Some investors tell themselves it's OK to ignore valuation when buying shares of excellent businesses. But apply that logic to other aspects of life. Would it make sense to shop at a store or dine at a restaurant that might charge any price? Of course not.
