The simple way to build a small fortune.
I'd like to share with you the story of a woman I'll call Jean. She was an ordinary investor like you and me, but she went from being a pauper to being a millionaire.
Then we'll talk about how you can do the same.
One woman's story
Jean was born in 1905 on a farm in the US. Her father died when she was 11, and the family found it couldn't manage the farm, so they moved to the nearest town, ending up among the poorest of its residents.
Yet, by the time she passed away at the age of 95, she had given her 15 heirs four tax-free gifts of close to £7,000 each and then passed on an estate worth around £700,000. In other words, she gave away more than £1 million.
How did she manage this feat? By working hard until the day she died? By pinching pennies so hard that she yelled in pain? Probably so, but she did more than that.
What Jean did was to invest in solid companies, steadily buying new shares and reinvesting the dividends all of her life.
You're probably expecting me to talk about dividends, but I won't. Rather, I want to point out how Jean's experience proves what Professor Jeremy Siegel of the Wharton School of Business showed in The Future for Investors: Investing in shares over the long term is the best way to build a fortune.
One example of fortune-building
Jean amassed her fortune by steadily buying shares of solid, long-term companies like ExxonMobil. They weren't flashy, even then, but between early 1970 and 2000, an investment in ExxonMobil, including reinvested dividends, grew nearly 114 times.
Not only did Jean invest in great companies, but she kept investing into her 70s, her 80s, and on into her 90s, holding her investments for decades. Buying and holding was an important part of her success and it allowed her to enjoy a comfortable retirement.
The 3 steps behind her success
Her "secrets" are simple:
1. Find companies with a record of good performance -- shown through solid earnings, free cash flow growth, and strong management -- and likely prospects going forward and then hold onto them for years.
2. Once you find one, buy shares consistently over time and reinvest the dividends. Rinse and repeat.
3. Do this for the rest of your life.
Using these steps today, an investment in one or more of the following companies -- and a plan to continue investing in them -- could start you on your road toward becoming a millionaire.
- BG Group (LSE: BG) both for its unparalleled oil and gas assets, its strong recurring revenue streams, and its exploration potential.
- Reckitt Benckiser (LSE: RB) for its high profit margins and strong household and healthcare brands, like Dettol and Finish.
- Diageo (LSE: DGE) for its focus on premium alcohol brands, including its massive worldwide distribution network.
- Tesco (LSE: TSCO) for its huge brand, dominance of the UK market, strong free cash flow, and repeat business.
- BHP Billiton (LSE: BLT) for its diversified mining production and its exposure to the growth of emerging markets, especially China.
Putting one or three of those in your portfolio and following her steps to success is almost too easy.
Continuing the tradition
It's so easy, in fact, that not only did Jean do it, but her kids and grandkids have also done it, with similar, amazing results. In fact, one of her grandkids is a subscriber to our US flagship newsletter Motley Fool Stock Advisor, which is where I first ran across her history.
Jean's three steps should be familiar to all investors. Yet I suspect very few active investors actually implement them. They are too caught up in making a quick quid or £50,000 to actually take a step back and realise they have decades to build their wealth, not days.
The moral of the story is simple, if not perhaps a little boring. Still, come 30 years time, I suspect you'll take 'boring and wealthy' over 'exciting and still looking for that one huge winner'.
More on the economy and the markets:
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> A version of this article, written by Jim Mueller, was originally published on Fool.com. Bruce Jackson has updated it.