The Young Investor In The Land of Capitalism

Believe it or not, young people today have a big advantage over older, more experienced investors. The problem is few of them are aware of it.

Why words of wisdom for the young investor? Consider this fact of modern life. Parents and schools today don't generally teach children much at all about money...other than how to spend it. It's tragic.

Young people living in a Capitalistic society need to learn just what Capitalism is and how how it can provide them a better life. They need to learn how to invest the money they earn. Doing so, can make them financially independent.

Over their lifespan, a young person entering the job market will earn most likely over a million dollars. Just $30,000 a year over 40 years is a $1,200,000. The question is, what are they going to do with their earnings?

Learning to invest intelligently is crucial. Young people, today, need to learn methods and means to enable their money to make them more money. And the sad fact is most young people today don't have a clue how to do that. In most cases, they don't even know it's possible.

Yes, it is true that the older investor has more experience and more knowledge about investing in the stock market. That comes with age. Still, that being the case, the young investor can produce vastly superior results over time. You might find that hard to believe, but it's true. And it will become obvious in just a minute when we discuss the power of compound interest There is another reason why you might find this article unusual. This is February 2009 and the stock market has tanked. One of the worst recessions in history has griped the entire world. And sadly, no one is sure how long it’s going to last. We'll probably be in its grasp for quite awhile.

So why should a young person invest in the stock market in its present condition. Wouldn't that be foolish? Absolutely not. If done intelligently, and given time, it can be a great opportunity for the young investor. In fact, it can lay the foundation for them to become financially independent. That's exciting.

Waiting to invest their money until later in life, no matter what condition the stock market is in, would be a colossal mistake. It would end up costing the young person today a tremendous amount of money.

Learn From The World’s Most Successful Investor

Picking the right stocks to invest in will make a major difference over time when it comes to results. So that is where we must begin. How should a young person choose their stocks?

The most successful investor the world has ever seen is Warren Buffet. And he has some simple rules that lay the foundation for investing in the stock market. One of his rules is to only buy stocks that an investor would keep for a lifetime.

There's a good reason this rule is so very crucial. You see, when you invest only in stocks you would keep for a lifetime, the movement of stock prices in the short run will not matter much. Fluctuations don't matter until a stock is sold.

So, first and foremost, to succeed in the stock market, the intelligent investor follows this rule. It lays the foundation for a strategy that makes so much possible over the long haul. And it is even more crucial for the young investor as you will soon see.

Beginner investors think that the way to make money in the stock market is by trading often. That's wrong. Trading often is a formula for investor suicide. Trading frequently in stocks is not the way Warren Buffett become the world’s most successful investor. What other proof do you need to show that buying stocks you would keep for a lifetime is the way to go. I learned a long time ago that life leaves clues. Here's a clue...invest like Warren Buffett, follow his rules.

So don't buy stocks to trade, buy good stock in great companies you will want to keep. You'll pay less in taxes, and you will get the profit from stock dividends growing over time. And most important, you will be putting compound interest to work for you. Compound Interest is the advantage the young investor has over the more experienced investor. We will be talking more about compound interest shortly.

Now, let's list the four rules for the young investor:

So Rule 1::

Only Buy stock in companies you are willing to hold for a lifetime.

Rule #1 explains why this moment in history is not a bad time to buy. In fact with the market down, the young investor will buy at lower prices than they would have only months ago. If you are going to buy stocks you’d keep for a lifetime, the lower the price the better.

Now let’s talk about the next step in buying stocks for young investors.

Rule 2:

Buy companies that are leaders in their industries.

Warren Buffet describes this strategy as buying stocks with a wide mote. Think back to old days. Centuries ago when castles had motes around them that would make it difficult for invaders to cross at times of war. How does this apply to companies in the modern day? It means the company has developed a business that would be very hard for competitors to re-create and compete against. Warren buys stock in companies like Coca Cola and Gillette. The young investor needs to use the same strategy.

Think about it. Since you want to buy companies you’d keep for a lifetime, they need to be able to survive a lifetime. A wide mote goes a long way towards insuring survivability. Now, onto the next rule for the young investor:

Rule 3:

Buy stocks that pay a dividend.

Over time you want your stocks paying you cash so you can buy more stock. In a minute we’ll talk about Dollar Cost Averaging. But to do Dollar Cost Averaging you need some cash to invest. You’ll need more than just the dividends, but the dividends will help.

Rule 4:

Apply Dollar Cost Averaging to your investing strategy.

Dollar Cost Averaging
means you don’t buy stock in a company all at once. You buy it in bits and pieces over time. For the same amount of money, you will be able to buy more stock when the price is low and less stock when the price is high. The average price you pay will be lower over time which will mean greater profits.

By applying the above four rules, a young investor will be in a position to put the power of compound interest to work. This is the young investor’s edge over older investors. Through compound interest, their money makes them more money which makes them still more money and so on. Over time, it really adds up.

It’s not the amount you invest that matters, it’s the plan that matters.

Starting out, the young investor will not have a lot of money to invest. That’s okay. And the reason is, it’s not the amount that matters most; it’s the plan that matters most. Discipline is the key. The young investor's must become a disciplined investor.

Start the first investor fund no matter how small. Yes, the goal in the beginning is to just accumulate some money. After all, you have to have something to invest with. Every young investor starts here. But over time, it will really add up.

Most of the growth in an account which grows from compound interest will occur in the later years. That's the way it is. At first, growth will be very small. Patience is required. But that patience will pay big dividends as the money compounds year after year.

The average investor doesn’t have a plan to increase the amount they have to invest. They go about investing haphazardly. Don’t be like the average investor. When money comes your way, whether through work, chores (for the young investor) or gifts, pay yourself first. That’s the key. Put some money away with which you can invest when you have accumulated enough.

Paying yourself first moves you from being an average investor to being a smart investor. An investor who keeps the big picture in mind, the end result.

What is the end result? That's simple. The end game is to become financially independent. And you do that by putting into action a plan which makes it possible for your money to bring you in even more money. This is accomplished through the power of compound interest. That is what the intelligent investor does. He puts him money to work so he doesn't have to.

When I read the book “The Intelligent Investor” by Benjamin Graham (Warren Buffet’s mentor), I took particular notice of one important idea. Benjamin Graham said to not go after spectacular results, instead to go after adequate results. Now that’s strange isn’t it? Adequate results instead of spectacular results. Why would he say that? Here’s the reason: if you go after spectacular results you will become a speculator and the idea is to become an intelligent investor.

No one can time the market. Don’t speculate. Invest for the long term. All you need is adequate results enhanced by compound interest. Do that and you will be one of the most successful investors there is.

What you want to do is look for real value. Buy great companies and don’t mess with the rest. When great companies go down in price because of some temporary setback, it becomes an opportunity to add to your holdings.

By being choosy about the companies you buy, you become a value investor, not a speculator. That’s what Warren Buffett is. He’s looks for great values, buys when other people are selling and in doing so, has become one of the richest men in the world.

A beginner investor becomes an intelligent investor by following the general principles outlined above. Here they are again:

Rule 1 for the young investor:

Buy stock only in companies you are willing to hold for a lifetime.

Rule 2:

Buy companies who are #1 or #2 in their industries.

Rule 3:

Buy stocks that pay a dividend.

Rule 4:

Apply Dollar Cost Averaging to your investing strategy.
Reinforcing what was said above, dollar cost averaging is buying stock over time by investing the same amount every transaction. By investing the same amount, the young investor will buy more shares when the stock is cheaper and fewer shares when the stock is running high. Over time the young investor will have more shares that are lower in price and fewer shares that are higher in price.

By doing all of the above with discipline, the young investor will put find compound interest working for them and the result in the long run is the accumulation of a lot of money. This is how the young investor becomes financially independent at a reasonably young age. That is something we all wish for but which is something few achieve.

There is a good book by the brothers at The Motley Fool, a well known investment website, that is an investment guide for teenagers. Appropriately, the name of the book is The Motley Fool Investment Guide for Teenagers. To learn more about the book, Click Here.
To go to the top of this page on the young investor, click here.

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