“This time it’s different.”
Famous last words.
Sir John Templeton, founder of finance titan Franklin-Templeton, called these the four most dangerous words in investing—probably because it sounds more like Vegas than Wall Street. There is a common misconception that you can, predictably, get rich quick in the stock market, just by picking the “right” stocks. But that’s Vegas talking.
As a matter of fact, Eugene Fama, the so-called “Father of Modern Finance” and Nobel Prize winner, said, “I'd compare stock pickers to astrologers, but I don't want to bad mouth astrologers.”
Harsh words.
There is just no way to pick the “right” stocks, all the time. It’s actually a researched fact that no human being on the planet has ever consistently beaten the general stock market. The average growth of the indexes, the S&P 500 and the Dow Jones Industrial Average, is so good that no one can consistently beat it over the long-term.
But boy, do they try! Most economists have more degrees than a thermometer, and there are hedge funds that employ dozens and dozens of specialists and experts. Economists often disagree with each other, each with their own arsenal of proof. Some hedge funds hit it big, but even the best ones can’t do it consistently.
There is one exception people generally present. He’s not in Vegas, and he’s not on Wall Street. He’s in Omaha, Nebraska, and he is so accurate so much of the time, he’s called the “Oracle of Omaha“.
The legendary Warren Buffet.
But remember, Buffett is not a stock trader. He openly admits his ignorance of the market and often corrects people when they ask his advice on what to buy. He considers stock-picking a fool’s errand as well.
The way Buffet generates his huge return in his investment portfolio is by buying whole companies, fixing them up, and growing them with his numbers-brilliant side-kick Charlie Munger.
So we could lump these investment-types into three categories.
1. Vegas: The word “investment” is here applied loosely. You have unlimited growth potential, for sure, but at super high risk. This is gambling—all in. Not somewhere you want to take your retirement savings.
2. Wall Street: The place investors go to “invest” in companies and share in their growth. Over the last 70 years, you have the potential to get north of 8% return per year, with relatively low risk if you are diversified* in the broad American market.
3. Omaha: The lifestyle of entrepreneurs, the business people who want to actively grow at an unlimited pace, limited only by one’s commitment and ability. If you’re in this category, you may have the potential and resources to create wealth at a rapid pace.
No one would recommend you go to Vegas as an investment. But, not many people have the ability to start companies and create wealth like Warren Buffet. However, anybody can go to Wall Street and invest in a smart, practical way, especially if they have professional guidance.