Back in the late 1980s, a young man named Stan Maguire decided to take a chance on the stock market and ended up making a fortune. He bet on the market to go up and ended up making a great deal of money. You can read about his story in the 2015 book, “The Biggest Loser: How to Lose Your Money and Live Your Life”, by John Rogers. The following is an excerpt from that book.
How Stan Made His Fortune
After graduating from the University of Texas at Austin with a business degree in 1985, Stan Maguire decided to follow in the footsteps of both his parents and become a stockbroker. He worked for firms like Prudential Securities and Merrill Lynch before striking out on his own. He started his own firm in 1993 and began attracting some big-name clients, including Warren Buffett. In 2006, Stan Maguire founded the Buffett company, Berkshire Hathaway, with other famous investors like Bill Gates and Larry Ellison. But before we get ahead of ourselves, it’s important to understand how Stan Maguire made his fortune in the first place.
The Biggest Loser
Like many other areas of finance, the stock market is a gamble. The difference is that instead of playing with chips or betting on the horses, you’re playing with other people’s money. If you’re going to bet on a horse, you might as well do it with money you’ve earned yourself. On the other hand, if you’re going to wager on the stock market, then you’re best off doing so with money you’ve been saving up or making through other investments. The less you have on the line, the less you’ll risk losing.
In general, the stock market is more dangerous than most other types of gambling because there’s more at stake. In most other types of gambling, you’re either risking your own money or you’re risking something less than your entire net worth. When you wager on the stock market, you’re putting your entire net worth on the line. The more you risk, the more you’ll likely win. This is one reason why many people are drawn to the stock market and why so many have made such incredible fortunes in such a short amount of time.
The Longer You Wait, The Worse It Gets
The shorter you wait to begin investing in the stock market, the better. You’ll have more time to make money off of your investment if you start early. The longer you wait, the worse the market will become. The reason is simple: opportunity costs. What is opportunity cost? It’s the total loss of value that occurs when you choose to invest one thing in exchange for another. For example, let’s say you choose to invest $100 in a mutual fund that earns 7% interest per year. After one year, you check your account and see that you now have $107.20. Your $100 has now become $107.20. It never really was worth what you initially paid for it; it was only worth what someone was willing to pay you for it at the time you decided to make the trade.
If you’d started two years ago, your $100 would be worth $116.40 ($107.20 plus $9.20 interest). If you’d waited three years, your $100 would be worth $127.60 ($107.20 plus $10.40 interest). This is why many professional investors and smart individuals say it’s best to avoid the stock market and instead focus on safe havens like bonds and real estate, which tend to outperform the stock market in the long term.
Risk Versus Reward
The key to successfully investing in the stock market is to carefully balance risk and reward. Just because a stock has gone up in value does not mean that you’ll necessarily make money off of your investment. There’s always the chance that it could crash and end up costing you more than it’s worth. You need to weigh the pros and cons and choose a suitable position, whether you’re a beginner or an experienced investor.
Let’s say you’ve been investing in a small cap stock for some time and the price begins to go up. Maybe it recently crossed $10 and you’ve watched the value go up by 10% since you bought it. You decide it’s time to sell and would like to make some quick cash. You ask yourself, “Do I really need to sell now? Maybe I can ride this a little longer.”
You’re now faced with a tough decision. Do you sell at this point and risk losing some of the value or do you hold on and hope that the price continues to rise? Remember: if it’s begun to go up, then it’s likely going to go down at some point. There’s always the chance that it could just as easily lose all of its value. The smart investor takes the time to research the history of a particular security and weighs the long-term and short-term risks, knowing the potential rewards if he or she decides to ride this one out. Sometimes, the rewards can be great but the risks can be high. It’s all about how much you’re willing to risk and how much you’re willing to gain. Take your time; do your research; and choose wisely. Good luck!