Probably the question we get asked more than any other is "How can I make money with stocks?"
Well, there are actually two primary ways that people make money with stocks.
They do so through (1) appreciation and (2) corporations giving money back to shareholders
either directly via dividends or indirectly through stock buybacks.
Let’s dive in…
— Welcome back you amazing 18,000 subscribers.
Let’s get straight into this one.
Of the two primary ways people make money in stocks, appreciation is the one that I
get the most excited about and where I believe the most opportunity lies.
Over the last 100 or so years (give or take), the stock market has gone up by nearly 10%
per year.
(Of course, you all know, that’s not a guarantee about the future… but) To put that into
perspective, if your grandfather had invested $100 in the market 100 years ago, it'd be
worth ... wait for it… about $1.4MM today.
(That’s the power of compounding!)
That growth has happened because the stocks of the companies that make up the market have
increased in value by that much on average.
So, over a long period of time, PERHAPS that'd be a reasonable expectation for you and the
money you're investing.
But there's no guarantee as to what the next decade (or decades) hold(s) for investors,
let alone the next year.
There are periods of time where the market just keeps climbing and seems like it can't
stop, there are also periods of devastation where the market just keeps falling and no
one wants to touch it with a 10-foot pole, and there are periods where the market is
just kind of sideways ...and frankly, boring for everyday investors with just broad exposure.
Allow me to walk you through some specifics from history…
Here's how the stock market has performed every year since 1928.
You see some years with massive losses and some with incredible gains.
The best year saw a gain of almost 54%, while the worst year a loss of over 38%.
But most investors in the market plan to invest for more than just a year.
So let's look at the 10-year annualized returns of an investment in the stock market starting
at every year since 1928...
That is to say, if you invested in 1928, what average return you would have realized if
you had left your money in the market untouched for the following 10 years.
As you can see some decades have been pretty flat and some have been booming.
For example, if you had invested in the market in 1949 and then never touched your investment
for the next 10 years, your account would have realized a 17.9% annualized return (that’s
without accounting for any sort of fees or anything, but still…).
That's amazing!
But if you had invested in 1999 (coincidentally the year I purchased my first stock...) and
left it alone for the following decade (which I did), you would have realized an average
annual return of -3.8% (sounds about right…and again, that’s before fees).
In all, more than 30% of those 10-year periods resulted in returns of less than 4% - a number
that might not be too exciting if you were counting on that 10% historical average that
everyone talks about.
But if we expand that holding period even further - from 10 years to 40 years - the
market has returned anywhere from 4.2% to 8.8%.
So, if you're planning to make money by investing in the market in general, it's really a long-term
play.
(And honestly, one that usually doesn't work out for most investors who try - they end
up making way less than the market does - but that's a subject for a different time - in
fact, the first 6 myths in Stop Investing Like They Tell You are spent really fleshing
out that phenomenon.)
And if you're here - taking the time to actually invest in your stock market education - I'm
assuming the potential for a 4, 5, or 6% annualized return over the next 4 decades isn't getting
you super excited anyway...
Don't worry, it doesn't get me excited either.
If that's all that was possible here, I wouldn't have made a career out of it!
Not to mention the fact that those returns are only going to happen IF history repeats
itself, which is NOT guaranteed…
We’ve talked about market and economic cycles in other videos, but suffice it to say right
now that when you understand those, I think you too will have your doubts that the next
40-year period might not even achieve that 4-9% range we just explored.
This is one of the reasons that individual stocks are so attractive.
No matter what the broader market is doing, there will always be individual stocks that
are outperforming.
And if you can learn to identify solid stocks, buy them when their price is low, and then
sell them when their price is high, then you'll have the tools to outperform no matter what
the broader market is doing - and you'll have the potential to realize much greater annual
returns on average.
It's not easy - it'll take some time and experience in the market to really master.
But it is absolutely possible.
And that's precisely what we try to teach here on this channel and in our private community.
Let me show you a quick clip from a video I put together for Ryan Scribner's YouTube
channel a while back.
This clip discusses two examples of investors who have been able to profit from their intimate
understanding of how stocks work.
Check
it out… https://www.youtube.com/watch?v=FFdGJF6nXQs
6:32 - 7:46
There you go - you can see what’s possible here.
Joel Greenblatt averaged greater than 40% per year over that 20-year period by investing
in highly-researched individual stocks.
Warren Buffett for 3 decades from 1970 through 2000 averaged more than 25%.
Finally, another example not mentioned in this video is the legendary mutual fund manager,
Peter Lynch.
While managing a massive fund, due to his understanding of stocks and the research required,
he was able to realize an average annual return of 29% over his 13-year tenure, from 1977
through 1990.
So you can see what’s possible when you take the time to learn and understand what
you’re doing here.
But that's all just one way that you can make money in the stock market - it’s exciting
and I tend to spend a lot of my time there…
But the second way is through the company giving money back to its shareholders.
That can happen through buybacks or what we’re gonna focus on here: dividends.
The goal of any company is to maximize shareholder value.
Some companies do that by reinvesting in their future growth - think: Amazon, Google, Facebook
- they believe (and most shareholders agree) that they'll be able to provide the most value
to investors by reinvesting in their company with the idea of generating even greater profits
in the future.
Other companies, however - often older companies - don't have as much room to grow, and decide
that the best way to provide value to their shareholders is by paying them a share of
some of the company's profits.
They do this through dividends.
For example, Coca-cola, at the time of this recording, pays a dividend of 44 cents each
quarter.
That means, if they were able to make that payment for a full year, they'd be paying
each investor $1.76 for each share they own.
Since you could buy Coke today for $63 per share, that $1.76 dividend payout, would represent
a return of about 2.8% per year.
Dividends provide another way for you to make money in the stock market.
You still have to know what you're looking for though.
You can't just base your investment decision on which company is paying out the highest
dividend yield for example - in fact, this is often a recipe for disaster.
But I hope this has helped you see the potential opportunity that exists in the stock market
and answers the question of "how can I make money with stocks?"
If you can learn to assess a stock for its value, growth opportunity, and/or dividend
quality, you'll have the potential to consistently make money in the stock market.
Let me know in the comments what excites you the most about making money with stocks.
Is it a particular strategy?
Is it the potential you see?
I hope you’ll take a second to let me know!
If you’re interested in learning more about diving deep into stocks, you’ll probably
enjoy and learn a ton from these deep dives.
If you’re interested in learning more about our private community, you’ll find all the
details here.
I can’t wait to get to know you better.
I wish you all the best.
Take care.