There are many different ways to profit from the stock market. Some people attempt to get rich quickly by investing in hot growth stocks. Others are happy to build up their wealth slowly by investing in large-cap stocks and reinvesting their dividends.
Yet regardless of an investor’s specific investment style, there’s one common factor that could be the key to making serious gains from the stock market. I’m talking about time.
The power of time
When it comes to making big life-changing gains from stocks, the power of time shouldn’t be ignored. Share prices will always move up and down in the short term, yet over the long term, the share prices of high-quality, dependable companies can often rise significantly.
The key to making millions from stocks, in my view, is to find companies that people, or businesses, rely on, and then hold them for 10 years, 20 years, or more.
Consider these examples. Ten years ago, shares in property sale website Rightmove could have been picked up for under 19p. Today, they change hands for 430p, meaning a £2,000 investment at 19p would now be worth over £45,000. Even if you had bought the stock at its 2007 peak, before the Global Financial Crisis, you’d still be sitting on a gain of around 600% now.
Similarly, if you had purchased shares in popular investment platform Hargreaves Lansdown in its 2007 IPO at 160p, and held until today, you would now be sitting on a gain of 1,060%. In other words, £2,000 would have turned into £23,000.
Even fairly boring companies, such as Reckitt Benckiser, which manufactures brand-name cleaning products, can generate spectacular returns over time, if you’re patient enough. Twenty years ago, you could have bought the shares for 800p. Today, they are over 6,600p.
It’s worth noting that all three of these companies have experienced significant share price falls on a short-term basis. Yet over the long run, they’ve generated incredible wealth for patient long-term investors.
Most investors panic when stocks fall
The reason that a lot of investors don’t make these kinds of life-changing gains from stocks is that they don’t have the willpower to buy and hold. They panic when stocks fall.
For example, recently I was reading some reviews of a popular stock-tipping company and I was simply amazed at the number of reviews that read something like this: “Signed up to their stock-tipping service and bought five shares they recommended. All five fell 10% in the next month. What a terrible service. I’ve sold up for a loss and I’m cancelling my subscription.”
Those kinds of comments suggest that a lot of people just don’t understand the stock market properly. In the short term, stocks will rise and fall with market sentiment. Even the best companies can see their share prices fall by 20% or more. We have no control over this at all.
Yet over the long term, high-quality companies tend to generate life-changing returns for those who are patient enough. Time could be the key to making millions from the stock market.
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Edward Sheldon owns shares in Hargreaves Lansdown and Rightmove. The Motley Fool UK has recommended Hargreaves Lansdown and Rightmove. 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.