My family bought our first computer in the early 90s. I just played games on it because the internet didn’t really exist. It was around this time Marc Andreessen was coding the first Web browser, which became Netscape Navigator. The internet took off, and then Microsoft released Internet Explorer to compete against Navigator.
Microsoft eventually won, and Andreessen left to form a venture-capital firm in Silicon Valley. With his buddy Ben Horowitz they started investing in startups. V.C.s make a lot of money when they give money to an entrepreneur who creates the next Airbnb or Twitter. They call these unicorns, and it’s how V.C.s make up for all the startups that fail.
Individual investors can apply this same mindset to their portfolios. They can invest in companies with bright futures, and then hold their shares while they wait patiently for the story to unfold. By using this simple method myself, some of my own stocks have become unicorns. They’ve pulled up the rest of my portfolio, helping me beat the market.
SAVE OR INVEST
A few years ago I came to a realization: there was no way I could sit in a cubicle for the next 30 years. I thought the best strategy was building wealth. I started this process by becoming aware of my behavior with money, and soon discovered that as my income increased I spent more.
This is actually quite common, and is called lifestyle inflation. I took these steps to reverse it, and the result was money began building up in my savings account. If you’re in debt, this is a great place to stop. You can use these savings to pay back lenders, and then start an emergency fund.
The downside to me keeping this money in savings was the 0.1% interest rate, meaning for every $10,000 I’d earn $10 a year. To build the wealth I needed it would take a lifetime, and I didn’t have that. The best way to accelerate the timeframe was to invest in the stock market, because it returns about 7% a year.
The only problem with this approach was I didn’t know where to start. Investing was intimidating, and I was scared of losing my money. But the choice was simple: I could either keep my money in savings or put it to work. I wanted my freedom so I chose to invest, and it worked.
INDEX FUND INVESTING
Most people are scared to invest. I was one of them. Eventually I learned Wall Street makes investing seem complicated and scary. This way you feel like you need them, and then they charge you fees. They don’t care if you lose your money because it’s how they make theirs.
I’m going to tell you what I did. First, I opened a brokerage account, and then I invested in an S&P 500 index fund. It’s made up of the 500 largest companies in the U.S., and you can buy them all together. It’s like you’re buying the whole market. For years, I automatically invested a fixed amount into this fund every month.
When the market went down, my fund came with it. I learned this was a good thing because I’d buy more shares with the same amount of money. Like a sale. When the market inevitably went back up my fund followed, and I got to enjoy the return on those cheap shares.
Living through the ups-and-downs of the market I built confidence. I wasn’t scared to invest anymore, and I learned a big lesson: if I held and had patience I would build wealth.
My girlfriend recently asked me if I would invest her money. I told her no. Instead, I helped her set up a brokerage account and she invests in a total stock market index fund. Now she’s an investor. The whole teach a man to fish thing.
She lets me know when she loses $100 because she’s not comfortable with the market yet. I tell her to hold and have patience. After I got past this point I wanted my money to work even harder. Most people say you can’t beat the market, and it’s stupid to try. I decided to try anyways.
I joined The Motley Fool’s Stock Advisor because they research and recommend stocks. Right away I started to invest in some stocks they recommended. I bought shares in GameStop, Netflix, and Starbucks. In a few months they went up more than my index fund so I naively thought beating the market was going to be easy.
In reality I had a lot to learn, but I did do something smart: I created journals for every stock I bought. I used them to track details about my stock purchases like the number of shares, price, valuation, and my reasons for buying. Over the years, these journals have helped me become a better investor:
Here’s my journal entry on Netflix. I made seven purchases over seven years:
On Netflix’s chart here’s where those investments were made:
My portfolio – around 25 stocks – has a number of stocks that have outperformed the market, like Apple, Amazon, Chipotle, Priceline, and Starbucks. But Netflix has been my unicorn. It’s pulled up the rest of my portfolio, the losers and the winners, and helped me beat the market.
People will say it’s luck to invest early in a stock like Netflix. But I’ve held it for almost a decade, waiting patiently for the story to unfold. When the average holding period for a stock is three months that’s the real challenge. It’s how you give your stocks an opportunity to become unicorns.
People send me emails to say there’s no way I could beat the market. One guy even told me my site was written for children (that one made me laugh). You can beat the market, and here’s proof:
There’s data that shows it’s possible for investors to have returns similar to mine. Jim Mueller, an analyst at The Motley Fool, recently simulated the three year return of 10 stocks randomly picked from their pool of active Stock Advisor recommendations.
He found that out of the 1.06 million potential portfolios, 70% beat the market, and 50% beat the market by more than 11 points. He’s looked at the five year return, and the preliminary numbers are even better.
It’s both easy and difficult to build wealth. The easy part is investing in either index funds or stocks. The difficult part is holding and having patience. To recap:
- Open a brokerage account
- Start investing with index funds
- Maybe graduate to stocks
- Hold and have patience
These are the steps I followed to reach my goal of freedom, decades ahead of everyone else. I’m not advocating this is the best way, or the only way, because there are different approaches to building wealth. This is simply what I did, and what I’m comfortable with.