How to use the Stock Market to build your own Wealth-Stream

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“To enable more families, from more countries, to use the strategies of Inter-Generational wealth creation, through the stock market, to create more wealth, for more family members, on a revolving basis.” 

Introduction

We have all heard, or read, about the stock market and how some people have used it, many from scratch, to create enormous wealth. This essay wants to introduce you to it with the suggestion that, although you still don’t know much of the details, you can, if you fall within the group with an open mind, use it to create some wealth for yourself too. Better yet, you could even use it to become the foundation of wealth for generations after you. It will help if you are also curious about how things work and don’t mind going to the experts for some help.

Against the background of being curious, ever wondered how, the people who built theirs, did it? While achieving anything worthwhile is not necessarily easy any more, it might not appear beyond us to build our own, if we can conceptualize it. Building our own might just mean acquiring an asset and nurturing it to throw off some cash periodically, over our lifetime. And we don’t have to start big! What we will need within it (the asset) is a built-in growth accelerator. And we will need the willingness to prioritize! This asset can be from any class like raw land, rental property or commodity like food or grain or precious metals.

My own asset class, and the one I recommend to you is stocks, because, it   (stock market) ‘checks all the important boxes.’ I also selected it because, I made some effort to understand the principles that drive it and you could too, i.e. compounding, and time (as measured in decades) meaning the years in our own lives and, it has a built-in growth mechanism (dividends) that multiplies its value over time without my input. In this essay, I invite you to come with me for the wealth-building ride, for you.

Important Notes

i) All essays (and everything at this website www.buildingintergenerationalwealth.com )  assume the material is;

a) refresher for many, but,

b) we always need to ‘bring in’ those who have not yet devoted any time to their financial Literacy and so,

c)  We ask you at (a) to bear with us.

Ii )  Every commentary is purely educational only**  See our Disclaimer HERE

Iii)  All of us (yours truly included) tend to be afraid of anything that is new to us such as the stock market.     Remember, though, our focus in this essay is not the stock market per se. It is on using it to build wealth for ourselves, our children, grand, and great grandchildren. And, in any case, it is not us who will be doing the work! It’s Compounding and Time (as measured in decades.) In other words, relax and ‘leave the work to the “workers”

iv) **Finally, we want you to check in with your RIA always for guidance on stock selection until YOU feel satisfied you are at a place where you can join him/her in the ‘stock selection department’.
v)  Its time we all send our money “out to work”  for us  (through the stock market) That is what this Essay is about-sending our money out (however small at first) to start working for us

Key Takeaways                                                                                                     (What you will learn about in this Newsletter)

  1. What is a Wealth-Stream?
  1. Think of a river with water flowing between its banks! Now, instead of water, think of something else, anything, flowing through just as the water does
  2. If you can imagine this ‘anything’, then you can imagine ‘the thing’ flowing through as being money! And it’s as simple as you have just imagined!  When you become a billionaire, or a One-Percenter (having more money than the ‘average’ billionaire) it’s like your money can flow as the water in a stream. When this happens, you have a wealth-stream that flows like a river.
  3. The purpose of this website (and the Book for which it is a forerunner) is to encourage you to believe, and show you how, it is possible for you to create a wealth-stream for yourself, and those who are coming behind you. Read through and see! It will not contain everything about building wealth but, hopefully, enough to demonstrate that it is possible for you to build your own!
  • Understanding Stock Market basics
  •  Some call it one of man’s best innovations

To lay the proper foundation to build our wealth-stream, though, will require us to understand some of the basic tenets of the stock market because, as we have already decided, it is through it (stock market), that we are going to build our ‘stream’. In fact, throughout modern times, the stock market has played such a pivotal part in the raising and deployment of money and wealth that, it has come to be regarded as one of the best innovations of our times because, among other things, it provides a platform on which we can put our money to work for us.

  • Place for buying & selling shares of companies

In essence this means a place where people who own the shares of companies (which they had bought previously) can meet and trade with other people who want, or may want to buy them, if the price is right. In former times, this trading used to be done face-to-face but now, it is done via a middleman called a Broker and, once you have made the payment, you can call in from home and place your order over the phone because, that is how your broker does it too, broker to broker! Brokerages have trained and certified individuals who may be known as Registered Investment Advisors (RIA) but this nomenclature is not universal. The description could be different in your country. Call your stock exchange to find out. The actual buying and selling is done by these certified individuals.

  • What is a company (or stock?)

Remember how we thought of a river when we dealt with your wealth-stream earlier!? Let’s now think of a company, also called a stock, as a house, and ourselves, as a family. The house  is a structure, a foundation, a unit of something that we can own, either by one person (in daddy’s name alone), or by us the children after daddy has gone up to ‘heaven’ and left us in charge! So now we know that the company is like the house that just one person can own, or all of us together.

          d) What is a share?

Think now of the rooms. It’s a big house. There are 10 of us, and 10 rooms, and, because we are now all adults, we each want our own room and so, that’s what we do. We each claim our own individual room without physically splitting up the one house into ten mini-houses. Put another way, we are now separate but still together. And this is the equivalent of owning a share in a company. Better yet, in the same way that our big house was divided into ten smaller rooms, all big companies like Amazon, Google, Facebook and Microsoft in America, or GraceKennedy, National Commercial Bank or Access Financial Services in Jamaica, or Guardian Holdings Ltd and Massy Holdings Ltd in Trinidad & Tobago, are similarly divided into millions, or billions, of individual units, or shares, and yet all are  under one roof, and title!! And, wherever in the world you live, a similar situation applies. All the big commercial companies are like a very big similarly divided up into individual rooms, or ‘shares’. Even better, you, and I, can buy these shares like anyone else and, if your education system (or your teacher) did not enlighten you to the fact that you can do this, this is what this essay is about. The interesting thing is that the economy of every country, including yours, and mine, is made up of many companies like the one we have just described. Its like all these companies make up one big house. If you own a room in this ‘house’, it is like owing a share in your country’s economy. Ofcourse, most of us prefer more than just one room so we buy more than one and the same mindset applies to the shares in companies which translates into shares in your country’s economy. We normally buy them in the hundreds or thousands and, when you become a billionaire, you buy them in the billions! And that is what this essay wants you to know. You can now own, become a shareholder, and thus a participant, in your national economy. This is where this essay wants you to be. A part owner in your national economy wherever in the world you live. But, more about that elsewhere.

  •   What is share Price?

        If you get to own your own room in a house, you can sell it for whatever you want; that is, if anyone will pay your price. Fact is, they may. Or may not!  After all, what you ask for may just be ‘your price’, that is, what you honestly (or maybe not!) think it’s worth or, you may know its not worth it but you ‘fly a kite’ because, somebody, for whatever reason, might just pay it.

  1. But what about the value of a share?

‘Price’ might be what you think your room is worth, but ‘value’ may be another thing altogether. Roughly speaking, value (at least to the buyer) is approximately what he, or she, is satisfied to pay ‘willingly.’ Roughly speaking, that will be the equivalent of your negotiated price and usually, one, or the other of you , could be on the ‘losing end’. Later on, when you go to an RIA (Registered Investment Advisor)to make the first of your investment purchases, you will, or may, hear him or her talk about intrinsic value. This, usually, is a figure arrived at from a string of mathematical calculations which, initially, may leave you spell bound. Take in the calculation if you are interested, but, ‘don’t sweat over it’. Just imbibe one thing. No two  RIA’s will do the calculation for the intrinsic value  for the same stock, in the same market, on the same day, and end up with the same value. In short, since the values for some of the inputs for the computation are subjective, the outcomes will, of necessity, be different. Are the different ‘share values’ in the same ‘ballpark’? That is what is important. (Incidentally, the investment trade has many rough formulae for approximating share values and we will introduce them in another Newsletter)

  • What is a market index?
  • ) In Jamaica, (and many other places in the world) there is a ‘scale’ in every ‘country shop’ for ‘weighing’ the food products that we buy. Usually, though, in what we call supermarkets, there is ‘no scale’ for weighting (or so we think) because, mostly, all products for sale are weighed before hand (pre-weighed and stacked waiting to be easily delivered to shoppers who may not have any time ‘to waste’ )
  •  In the same way that supermarkets use 16 ounce scales to measure how many pounds of a product they have sold in a day, or week, so, too, does the stock market use a special scale to measure how much stock is sold in a day, week, or a year. In the familiar supermarket it is called a 16.oz hangingscale. In stock markets worldwide, this ‘scale’ is called an index. It adds up every day’s sale of shares and gives a report that anyone interested can use. In another place, we will go into the details of this “index scale”. Suffice it to say it does a very reliable job of measuring the amount of stocks that are sold over any period of time, and which, as you now know, is being used to create market-based wealth for investors. 
  •  Platform for money to work for man, (‘over time’)
  1. From what we have said so far, John Bown (JB) has the ability to ;
  2. Put a price on the value of his room (apartment) and
  3. Sell it if he wants to
  4. But he also reserves the right to refuse to sell it until he gets what he considers to be the right price and,
  5. If he does not get the ‘right price’, he can leave it to the elements, (except that his siblings would more than likely ‘capture’ it, as we are fond of saying in Jamaica)
  6. In other words, JB now has a platform which gives him choices, and, even more,
  7. Because, since he has choices, he also gets the element, or value, of time. He has the luxury of making decisions in his ‘own time’
  8. Unless he is compelled by circumstances to sell.
  • What is an investment-mindset?
  1. It is the tendency for a person to look at his money, and weigh up the different usage possibilities. And, if he so choses, he can, (or not) make a conscious decision to invest for greater, but future outcomes, versus the known benefits of consuming now. For example, say ‘JB’ wins a $10M lotto prize. Here are some potential choices for its use;
  2. Consume it now, (like buying a car) or
  3. Invest it, i.e. postpone his current wants until later because
  4. he has been following the stock market and, (although he hears there are no guarantees of a ‘quick money’,
  5. he ‘sees‘, in his ‘minds’ eye’  how, in the long run, he could buy the car and
  6. Leave himself on a much better financial footing
  7. While “JB” was told that there are no guarantees in the stock market, he had gone to see his RIA  and was told that with his $10M he could
  8. buy the shares of a dividend paying stock
  9. re-invest those dividends to
  10. ‘grow’ his number of shares without taking any money from his pocket, and thus,
  11. Down the line, have enough money to buy the car (and maybe even do other things)
  12. While still ‘having his $10M’ but now, not as a car, or dollar bills in the bank but, instead, as many shares in a company that pays him a  dividend every quarter (just as the stock broker had told him.)
  13. ‘JB’ though, was not the only Lotto winner in town! ‘MJ’, too, had previously won his own $10M prize. And ‘JB’ and he drank at the same bar. Naturally, ‘JB’ told ‘MJ’ what he, ‘JB’, would do if he also won $10M (which eventually happened) and suggested to ‘MJ’ that he should go and talk with an RIA too, but ‘MJ’ would have none of it.
  14. His (MJ’s) view was that
  15.  ‘man only live once’ and that, since for all his life he ‘did without’ because he never had any money
  16. He was not going to allow this ‘one-opportunity’ to pass him
  17. And so he did live  the ‘high life’
  18. Played the ‘big shot’ to family, friends, neighbours and even strangers, and
  19. Eventually, ‘MJ’ went back to where he started.
  20. ‘broker’ than a church mouse
  21. These are two real life scenarios and emphasize the following realities of our world
  22. Illustration of an investment mindset, ‘JB’
  23. The value of having a RIA in your corner, ‘JB’
  24. The tragedy of the absence of financial literacy ‘MJ’
  • Understanding the factors that drive wealth creation in the stock market

Many things depend on other things to happen. Think of the rain. We were told, from school, that the sun heats all water surfaces, transform the water into vapour and that, eventually, the cold ‘up north’ forces the warm vapour to condense and come back down to us as rain, which we know is a form of water! Not exactly, but something nearly similar happens in the stock market. One thing depends on, or reacts to the other, and, before you know it  wealth  is  being created for the investor when neither he, nor she, is looking! Or giving instructions! And, before you know it, even you, too, could start talking the language of the stock market. Lets take a look at two of these wealth-building factors

A.  Compound Interest

Yes, this is the same thing they taught us in school (or tried to!) Trouble is, they either didn’t ‘do it good’ or, they didn’t bother to tell us that the concept is one of the most powerful and transformative constructs in the stock market, as well as the rest of the universe. Ever heard of Albert Einstein, the most influential scientist the world has known to date? He is said to have said two things about the concept of compound interest as follows;

  1. “It is the 8th wonder of the world”

ii.  “He who understands it, earns it. He who does not, pays it”

  1. Interestingly, even if we don’t realize it, compound interest  is our ever-present companion especially if
  2. We ‘carry a mortgage’ on our house, or
  3. We borrow money from the bank to buy our car 

B. And what is compound(ing)

i.   In simple terms, some people call it the earning of interest upon interest. It means rapid accumulation, and

ii.   the term compounding has come into use in the stock market to refer to an investment strategy where you encourage, or force something, to compound, multiply and grow at a faster rate, than usual.

  1. For example, if, as a stock market investor, you own a dividend paying stock and,
  2. when you get your quarterly dividend you
  3. re-invest it in the stock that paid it (instead of consuming it)
  4. this would be called compounding and
  5. it is one of the best ways to grow your investment, meaning your wealth
  6. incidentally, it is the same principle of compounding that would have caused your mortgage, or car loan, to be the massive amount that it is (many times the amount that you borrowed) I call this situation having ‘compounding working against you’
  7. and hence, if you follow the practice of compounding in your personal investing activities, it would be pretty much like ‘flipping the coin” on your Bank, or whoever lends you money. When you do this, that is, have an investment in which your money is compounding for you, it you have putthe concept to ‘work for you’!! This is what successful investors do…….’turn the tables’ on the banks so that the concept works for them (investors) vs just the money lenders!

C. Time (As measured in decades)

 Time is the other factor that helps to create wealth in the stock     market (whether you are ‘looking’ or not) Think of it as….

i.       time, measured in decades or, to put it another way

ii.     time as in the years in your own life,

  1.    It works the same way as with your car loan. If both A and B take the       same size car loan but A elects a payback period twice as long as B
  2.     A will pay less per period but, at the end of payback time
  3.     He (A) will have paid back much, much more
  4. And, as if by magic, the longer ‘investor you’ keeps re-investing your dividends (compounding) in your investment in the stock market, (other things being equal) the more wealth you will accumulate.   
  •  What are dividends in the stock market?

We have already touched on dividends (above) and, there is a lot more we will say about them elsewhere but, for now, we just want to say that when you become a stock market investor, you buy the shares of companies(called stocks)for a range of reasons and, two of the most important are to:

  1. Get a share of the profits (dividend) that the company makes, and
  2. Expectation that, over time, the price you paid for each share goes up so that, if you sell it, you will make a surplus on your investment.

It doesn’t always happen but, as anticipated, companies do make a surplus on their operations and, when they do, the general practice is to share some of it with the people who own their shares. The bigger part, as you would expect, is retained to pay operational expenses and grow the business. As already alluded to (under 6 above) the name of the portion that each investor gets is dividends. And, as you will have imagined by now, the amount that ‘investor you’ get is paid on a per share basis. Put another way, if you have one thousand shares and I have only five hundred (half of yours) I would get half the amount of dividend that you get because (well, you have just worked it out!)

Chapter 13 of my Book speaks much more extensively about dividends and, in the Newsletter that deals with it, we will even highlight one of the many companies that have paid dividends continuously for more than one hundred years. Here is something else interesting about some dividend payers. Although there is no contractual obligation to do so, the management teams of many companies feel a kind of self-imposed obligation to do so, maybe because they know that many investors buy their shares to supplement their pension and living standard from the dividend they expect to receive. This linkage has become so important, and well-known, that, when a well-established divided payer does not pay, or cuts, meaning lowers what the investing trade calls the dividend rate, analysts tend to show their displeasure by discounting the share price, maybe as  a form of ‘punishment’ of the company. Ofcourse, if you are a shareholder, and have ‘strong faith’ in the company’s ability to ‘come back’ with its dividend payment, you would gobble up the shares when the price is lowered. Analysts are very important people in the investment business. They analyze the organizational strengths and weakness of companies and become knowledgeable about them. They are not always correct in their pronunciations but, it pays to pay attention to their comments.

  • So, how do we build our own wealth-stream?

Short answer; we need a strategy.                                                                Up to now, (in order to build our own wealth-stream) we have been following a particular trajectory and it is now time that we try to summarize it into actionable specifics.Here goes;

  1. Have an understanding of what we want out of the market [something specific, an objective, like, ‘build up some money for my retirement’]
  • Have a rough idea about how it can be done without we, ourselves, being experts at it (speak to RIA)
  • Find the expert (RIA) who we can rely on to be one or the other (or all three) of the following
  • mentor,
  • counsellor
  • guide through the stock market
  • buy the recommended dividend paying stock from our RIA
  • re-invest all, or as much as is possible of the dividends we get (which we know to be compounding)
  • this will grow (multiply) our number of shares, called  share count, which translates into more wealth
  • hold this investment in the stock market for decades (match our life span) because we know that

i. the longer we compound our dividends, and

ii. keep our investment ‘in the stock market’

  • the greater our personal wealth-stream will grow!
    • Note: It is no more complex than this! And all the experts have been telling this to us for a very long time.
    •  
  •  More wealth-building factors in the stock market?

Yes!

As you can imagine, building personal wealth in the stock is probably as varied as there are individual investors.  So far, we have looked at two, Compounding, and Time (as measured in decades) and the tremendous influence that each plays individually, and, even more importantly, collectively. But there are many other wealth-building components which we will deal with in other Newsletters.

Against this background, meet one of the other experts (in addition to your RIA). He is Benjamin Graham, who the investing trade calls the father of value investing. We will deal with this investing modality another time. Right now, we just want to highlight one of his many injunctions to investors like us. It says “an investment in knowledge pays the best interest” Here, the knowledge we are talking about is also called financial literacy. It’s a key concept for us to embrace as we pursue our objective of building our personal wealth-stream. Look at it this way. The responsibility for our wealth status should be ours. Not our President, Prime minister, or the Pope. (I call these guys the 3 ‘P’s and, yes, their economic policies should be facilitative but, the responsibility is ours, not theirs!)

In pursuit of this (financial literacy) here are a few more terms to know even at this early stage of building your wealth stream

  1. Bull market:

This is a marker where, for whatever reason, many investors (not all) feel confident that prices will continue to go up and are willing to pay rich (meaning high) prices for the shares of many companies. Note: Since the market crash of 2007/8, world markets, especially the American, has gone up as though money is of no consideration (up to about mid 2022) As new investors, you and I should be wary of bull markets.

  • Bear market:

This is a market in which, for whatever reason, investors start losing confidence that other investors will buy the shares of companies for which they had paid high prices and are now having fears that they will lose their investment. Where this happens, present investors are usually willing to sell for whatever they can get to ‘cut their losses’. Note: This is, sometimes, the best time to buy shares i.e. when current investors are fearful and selling to ‘cut their losses’. Unfortunately, not many ‘investors’ realize this but, you and I, and our RIA  should know, that this could be the best time to buy (when others are selling out) if we want to excel as  stock market investors.

  • DRIP

Acronym for Dividend ReInvest Programme which you already know

  • RIA

Registered Investment Advisor (which you already know too)  The main point here is that, in your country, these important people might go by another name. To find out, call your Stock Exchange and enquire.

  1. What some investment experts have said about successful investing

There are many successful investors who have shared some of their best thoughts with the rest of us and, it’s difficult to choose whose thoughts to share with you as a new investor wanting to build your own wealth stream. But, here are four and what they have to say about stock market investing

  1. Paul A Samuelson

Nobel Prize Economist. Believe it or not, this is what he said: “Investing should be more like watching paint dry or watching grass grow. (If you want some excitement, take $800 and go to Las Vegas”) Get the point?! You shouldn’t have to ‘sweat’ over it!

  • Prof. Jeremy Siegel;

In his landmark book ‘Stocks for the Long Run’ says “Successful investing requires only patience, not foresight”

  • Michael Larson, Bill Gates’ Investment Office, in his Foreword to Prof. Gary Smith’s “Money-Machine”:

“Think of stocks as money machines. Think of the cash you will receive if you own this machine”

  • Warren Buffett;

Generally regarded as the best stock market investor in the world “To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing, or emerging markets. You may, in fact, be better off knowing nothing of these.” Warren Buffet 1996 Letter to his Berkshire Hathaway Shareholders.

  1. Satisfied now that you can build your own wealth-stream?

     First thing you should do is look up to see who these people are for yourself.  After  you do, and  find out they are four of the world’s best investment minds and practitioners, you will probably be thinking one, or both, of the following;

  1. The stock market is really ‘the person’ which will be doing the work to build my retirement money! and,
  2. Looks like it’s a place where people, called investors, send, or put their money to work for them
  1. You are there!

If you come to any or both of these two conclusions, you would be 100% correct. As I have written in other places, success in the stock market may not be as easy as sleeping late on a raining Sunday morning. Still, it is not much more difficult.

This Essay, written for you,  would have served its purpose if you now know that ‘truth’. Go your way and build your own wealth-stream!                                                                                                                                                                        It is Possible!

Posted on Sep 15, 2022 by Lloyd A. Vermont Sr.

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