I don’t reckon it’s a good idea to aim for seven-figure wealth by buying tickets in lotteries. The headline prize figures may be large, but your chances of winning the jackpot are vanishingly small.
And betting on the price of Bitcoin could end up being a similar losing strategy as the outcome depends on chance more than anything else. The price of a Bitcoin is above $8,000 as I write, but how did it get there? Without any fundamentals backing up the surge in Bitcoin’s price, it’s hard to justify the value.
My guess is that speculation is the main thing driving Bitcoin, and when the speculators stop punting on the cryptocurrency it could come crashing back down again. So I see it as a risky vehicle for investment and wouldn’t try to make £1m with it.
Avoiding speculative shares
However, the surge in ISA millionaires over the past few years demonstrates that there are better odds of making a fortune by investing in shares and share-backed investments in the stock market. That’s the well-trodden path to seven-figure wealth that I’m walking along, and you can do the same.
I don’t believe this country’s ISA millionaires were successful because they went for high-risk companies with tempting upside potential. Sometimes, the shares that look most likely to make us rich are the ones that end up losing us the most. One good recent example is Sirius Minerals.
A common trait of speculative shares is a lack of meaningful earnings in the underlying business. Another is the promise and expectation of bountiful earnings later, which could drive the share price higher by many multiples. In other words, a great ‘story’.
Sadly, the actual outcome for shareholders is very often the loss of their invested money, so punting on speculative stocks isn’t a good way to achieve seven-figure wealth. Instead of that approach, I reckon most ISA millionaires focused on compounding gains from shares backed by good-quality, growing underlying businesses.
Focusing on quality and value
For individual company shares, I like to look for firms that have immediate earnings and dividends, and the potential for growth. With stocks like that you can collect income from the dividends while waiting for the operations of the underlying business to generate growth and move the share price higher.
One way of identifying a decent enterprise is to focus on quality indicators such as decent profit margins, a consistent record of trading and financial performance, and steady growth in the numbers for revenue, earnings, and cash flow. After that, it’s important to think about how the company can grow further and, finally, to buy the shares at levels that don’t over-price the business.
If you find yourself without enough time to research and monitor the shares of individual, high-quality businesses, I reckon you can also do well by investing in managed and passive funds.
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Kevin Godbold has no position in any share 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.