Quite a few folks in the financial media (including me, I confess) have been eyeing the rather peaky-looking state of the stock market and pondering defensive moves. Make sure you're really comfortable with your level of risk, we say. Look for value. Buy dividends.
That's all good advice. But every time I write one of those articles, I hear from Fools who say something like, "Worrying about the state of the market sounds too much like market timing for me. I want stocks I can hold for a long time that will make me wealthy."
So here's what I've been pondering: Can you get wealthy -- really wealthy -- by holding stocks for a long time?
Over the years, my career has brought me into contact with a few wealthy families and their investment portfolios. I'm talking about old-Yankee-money types, who trace their current wealth to an industrious ancestor a century or more ago, and who have had that wealth professionally managed -- for growth and for income -- for decades.
What's relevant to us is that these folks' family portfolios tend to be built around the stocks people now see as rock-solid mature companies, such as JPMorgan Chase
I like stocks like that. I own a few myself. And it's easy to look at a wealthy family's portfolio and think, "Hey, they're rich and they own those stocks. If I buy stocks like that, maybe I'll get rich too."
But is that really how one builds wealth?
"Warehousing" versus wealth-building
In his best-selling book The Millionaire Mind, wealth researcher Thomas J. Stanley notes a survey of millionaires that found that less than half -- 42% -- indicated that "investing in the equities of public corporations" was an important factor in explaining their economic success. Stanley writes -- and this is consistent with what I've heard elsewhere -- that many millionaires think of the stock market as a great place to "warehouse" wealth built elsewhere, but not as a wealth generator in and of itself.
I think that's both right and wrong.
On the one hand, if you're simply shooting for market-average returns, the math doesn't lie: $10,000 invested at 10% for 20 years turns into $67,275. That's a nice return on savings, but it's not huge wealth.
And when I look at the stocks some of my fellow Fools think of as "hold forever" stocks nowadays, whether newer firms like Amazon.com
Those are desirable stocks to own. I own a few like that, too. But they're not going to build big wealth anytime soon. Without a time machine, you're not going to get rich holding stocks like Apple.
Risk and wealth-building go hand in hand
Despite their lukewarm feelings about stock investing overall, 74% of Stanley's millionaires did say that a "willingness to take financial risk given the right return" was an important factor in their success. Many others talked about the importance of being willing to invest in their own businesses, and of other values related to entrepreneurship.
Entrepreneurship is a potent source of wealth -- maybe the best source. Of course, not all of us are entrepreneurs. But we can all invest in entrepreneurs. Putting $10,000 in Amazon.com stock might net you a nice solid return over time. But if you had put that $10,000 in Amazon on the day it went public in 1997, it'd be worth more than $480,000 now, just 12 years later -- despite the dot-com crash and despite last year's market drama.
Now, I'm not suggesting that you buy IPOs. But I'm also not suggesting that you buy Amazon or Apple. Instead, look for the next Amazon or Apple. A future super-growth story. It may already be public, but tiny and largely overlooked by the market. Or it might be an established company entering a new phase. Marvel Entertainment
Those are the stocks that will really "build wealth."
Are those stocks risky? Individually they might be, especially when compared with buying a blue chip. And if you buy a dozen of them, even if you choose really well, you might only make significant money on one or two.
But if you've ever read Peter Lynch, you know that those one or two "10-baggers" (or 20-baggers, or 50-baggers like Amazon) every now and then can drive huge gains for your overall portfolio.
And that's how you build real wealth with stocks.
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Fool contributor John Rosevear owns shares of Apple and still kicks himself for not buying Marvel several years ago. He has no position in Marvel (alas) or in the other companies mentioned in this article. Apple, Amazon.com, and Marvel Entertainment are Motley Fool Stock Advisor picks. Johnson & Johnson is a Motley Fool Income Investor recommendation. You can try any of our Foolish newsletters free for 30 days. The Motley Fool has a disclosure policy.