Thought Of The Day: The Three Ways To Get Rich

As I see it, there are 3 ways to get rich; These are: by getting lucky, by starting a business or by investing.

Getting Rich By Luck

There’s luck in everything we do, whether it’s in business, investing, or any other part of live. But this way to get rich by luck refers to things like lottery wins or being born rich. This isn’t a valid strategy to make yourself rich, and if it were, it would be mega risky and really fast (assuming you were lucky straight away). Clearly gambling is not a strategy for getting rich that you should consider.

Getting Rich By Creating A Business

This method is more work that getting lucky. In fact, I would say that creating a business is the most work of the three ways to get rich. I would say that it’s medium risk (less risky than gambling, but more risky than investing) because compared to investing, you have all your eggs in one basket (in terms of money and time). The benefit to starting your own business (as a strategy to get rich) is that it’s a faster way to get rich than investing. When you consider that luck isn’t a strategy, I would say that creating a business is the fastest way to get rich.

Getting Rich By Investing

Finally, this is the slowest way to get rich, but it’s also the most reliable and least work (excluding getting lucky, which isn’t really a strategy to get rich). This is good news because anyone with a regular job can become an investor, which means than anyone can become rich with time.


Investing In A Cure For Covid19

There are a bunch of listed companies with prospective Covid19 vaccines that are quite popular investments at the moment. I just wanted to take the opportunity to warn investors of the risks of such an investment.

Pharmaceutical investment is a curious business. Costs are massively high in this industry and companies often run for many, many years with no results. Once (if) the company successfully researches a cure for something (and it gets past all the necessary hurdles), there’s big money to be made. Especially so if it’s a vaccine for something that everybody in the world needs to buy.

Because of the nature of this industry and the way Capital Raising (CR) works, this can create traps for investors.

As the cost of research is high, pharmaceuticals often need to raise money. In order to entice people to invest, they need to sell the story. This means taking every little positive thing and singing about it as loudly as possible. As the subject is highly technical, investors are usually in the dark about the significance of such announcements and are often led to believe that things are further along than they really are.

For example, a company researching covid19 might announce that they have found a substance that successfully attaches to the virus and not human cells. This might be a significant discovery but not necessarily get the company any closer to a vaccine.

The other problem with such CRs is that they dilute existing shareholders and directors. Therefore a company would want to increase the value of the shares before they announce a CR. They might time CRs after small (but not necessarily significant) technical wins or be deceptive about timelines (without lying) to investors.

For example they might say things like “we are now moving to human testing”. This could mean that they are on the brink of a cure, or it could be part of the normal process of testing multiple candidate drugs as part of normal research, or it could be referring to the testing of the efficacy of a delivery system to be used when they discover a cure.

Of course the above examples are bad, but my point is that they can truthfully and correctly use words that make it seem like they’re on the edge of greatness, but actually miles from success. This typically happens through scientific (or industry) jargon or process that is presented in a way to deliberately mislead potential investors in order to pump up the share price prior to a CR and get investor interest.

Of course I’m not saying that you shouldn’t invest in companies searching for a covid19 vaccine, but just warning that there are pitfalls to consider when investing in, or basing your investment decisions on a covid19 cure.

For this investor, I find this sort of investing too much like gambling. That said, I think that such an investment would be great for a trader or an ethical investor who doesn’t mind a gamble.


Why You Shouldn’t Buy A Lotto Ticket On Rollover Weeks

Last week I bought a lottery ticket. I didn’t buy the ticket because it was a roll over; $34m is no different to me than the standard $11m, or in fact the few hundred thousand more I need to achieve my current retirement goals.

I bought the ticket for a bit of fun/hope (despite my gut assuring me that I wouldn’t win) because I’d had a hard week and dreamed of a quick out to it all – one that didn’t involve my death.

I guess that this is the main reason people buy lottery tickets, because they don’t see any way that they can amount any sort of decent sum of money and want to improve their situation.

Unfortunately, despite how the Lotto ticket states on it that “you are helping New Zealanders” when you buy a ticket, you’re not actually helping the New Zealander that matters the most (yourself).

The Chances Of Winning NZ Lotto

Let’s look at the chances of winning a decent sum of money on the NZ lottery. The numbers below are taken from the NZ Lotto website:

  • The odds of winning over $350k are less than 1 in 3.8m for the NZ Lotto.
  • The odds of winning over $11m are less than 1 in 38m for the NZ Lotto Powerball.
  • The odds of winning over $300k are less than 1 in 2m for the NZ Lotto Strike.

Given the above, it’s fair to say that in your lifetime you are very unlikely to win any sort of decent money in the lottery.

Winning A Million Without The Lottery

Let’s look at how that $20 per week would have faired, had you invested it in the stock market over the years, instead.

Given average annual inflation of 3% (reducing the value of money) and the average return on the NZX of 14% per year, we can calculate a compounding annual rate of return of 11% (14% – 3%). Excluding the cost of broker fees and only applying interest at the end of the year (instead of throughout the year, in order to more than compensate for the brokerage fees), over 20 years of investing in the NZX you would have saved the modern day equivallant of $66,771. Over 40 years you would have saved $605,099. This number compounds to $1,026,104 after 45 years.

In other words, a 65 year old investing from age 20 would have retired with an extra million dollars or with an additional income of $30,783 after tax (based on a million dollar investment with a 5% ROI before tax).

From this, we can clearly see that as an investment in your future the lottery is a really bad option, and even $20 per week squirreled away in a carefully selected Sharesies stock investment is a great get rich slowly scheme.


Is Investing In The Stock Market Gambling?

A lot of people feel that investing in the stock market is gambling. I would argue that while some types of investment in the stock market is certainly gambling, depending on the systems you use to place your investment, investing in the stock market may not be gambling.

I fully realize that this statement sounds exactly like something a gambler would say in order to justify their gambling habit (and to be entirely honest, I phrased it that way to draw parody for a little fun). Hopefully by the end of this short article I can convince you that investing in the stock market is not gambling.

Let’s start with types of investment that are closer to gambling. To do this, let’s look at what gambling is: playing the odds to try to win more money at the risk of losing all or some of your money. Based on this definition, I believe that investing in companies with no predictability is gambling ( such as mining companies that are yet to make a profit; companies with no financial history or undertaking new endeavors; and I realize this is going to be contentious and unpopular, but I would say investing in companies purely on TA and without looking at their finances or researching them properly). For me, this type of investing is gambling because you’re playing the odds.

For me, investing based on calculated Return On Investment (ROI) is not gambling (accepting that there’s an element of risk in all things). In other words, if you invest in a company that is valued at a multiple of it’s profits or future profits that you find to be an acceptable ROI and you’ve sufficiently researched the company, then this isn’t gambling. The resultant ROI might be via dividend or increased Market Capitalization (MC), providing the justification for the increased MC lies in it’s underlying ability to generate money at a rate that represents an ROI that is favorable for another sensible investor.

When we consider a calculated ROI and well researched company, investing is no different from a slightly riskier term deposit bank account “investment“. Finally, I would leave you with the idea that an investor who buys into a company based on an expected return will not feel bad if the share price falls from the price they purchased at (with the exception of a black swan event) as they will still be on target to get a return they are happy with (they just won’t get the best return that they could have).

Addendum: As with all investing, I recommend sufficient diversification to cover drops, in accordance with your own financial models / plans.

Also, I recognize that while an investor may not mind the price of their held stocks falling, this does increase the risk of financial loss if something happens which requires the investor to exit that stock (such as unacceptable performance or a black swan event).