If I had a pound for everyone who’s ever asked me for the next hot ‘get rich quick’ share tip I’d be getting, well, slightly richer quite slowly.
Piling into the latest popular stock when everybody is already bigging it up can be a serious mistake. By that stage, you’re often looking at a bubble-style over-valuation, and losing money from that point is more likely than gaining.
I think Purplebricks is an example — thanks to successful advertising, people who wouldn’t normally buy shares are getting in. Now, I’m not saying you need to find secret stocks that nobody has heard of, just keep away from the hyped ones.
Going for penny shares can be a mistake too. The idea here is that, say, a 10p share must have more upside than a £10 one. But a company with £10 shares could potentially do a 100-for-1 stock split at any time and end up with 100 times as many shares in circulation at 10p — without any change in its prospects whatsoever.
Some suggest you have less to lose with a penny share too, but that’s nonsense — the most you can lose out of every investment is 100%, regardless of the share price.
Invest, don’t gamble
Approaching the stock market like a gambling habit can be ruinous, and I’ve seen many would-be millionaires doing it. They buy what they think is going to be hot, the quick profits don’t materialise, so they sell and move on to the next big thing.
On average, you might expect to at least break even like that, but that reckons without dealing charges and the price spread — and the latter is bigger with penny stocks. Look at President Energy, for example. Right now you’ll have to pay 8.25p to buy a share, but you’ll only get 7.5p if you sell one — you’ve lost 9% before you even start, and if you trade too often that will mount up to a lot of wasted money.
Trying to time the market is unlikely to get you rich quick either. Plenty of folk examine chart formations and patterns, and try to guess the short-term future from them. Many report success too, but none of the investment greats over history has ever been a chart-follower.
Trying to time the ups and downs and get in and out just when it’s right is another losing strategy.
In fact, any kind of short-term approach is likely to be a poor one, as nobody has yet managed to come up with a reliable way of telling where the market will go tomorrow, next week, or next year. It’s only when we get to five-year and 10-year periods and longer that any kind of predictability starts to emerge.
So you can’t get rich investing in shares? No, that’s not what I’m saying at all. You very much can, but you need to take a long-term view of it, and think like an investor and not like a gambler. For me, that means buying dividend-paying blue-chip shares, and keeping them for decades while reinvesting the dividends.
According to Barclays‘ annual Equity Gilt Study, if you’d invested £100 in the UK stock market in 1945 and reinvested all your dividends in new shares, today you be sitting on a stunning £180,000 after inflation.
And that’s what I call getting rich.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.