Is the Stock Market a Place to Make a Fast Buck?

I have met in my long consulting career of about three decades many people who believe that the ‘Stock market’ is the place to make a fast buck – a place where one can become rich quickly. I have also met an equal number of people who is convinced that stock market is the most dangerous place on the earth, and that it is meant solely for gamblers and speculators and certainly not for investors. I can state with conviction that both the extreme views are far from the truth.

Playing the stock markets is certainly not the get-rich-quick solution. On the other hand those who enter with such a notion are sure to burn their fingers. Of course there are a few exceptional examples of individuals who have consistently made successful bets on stocks, currencies and commodities, but these examples do not hold good for most of the large number of speculators indulging in day trading. Those who had made quick gains a few times should attribute the success only to pure luck; they are bound to run out of lady luck soon and are face the unpleasant consequences.

Stock market is also a place where through prudent, disciplined and sustained investments, spectacular wealth can be built over very, very long periods of time, spanning two to four decades.

Why is it that there are no shortcuts to wealth creation? What are the essential ingredients of wealth creation?

Essentially there are two key factors behind wealth creation: natural growth in companies and secondly by the operating of the compounding effect.

Natural Growth:

Companies that supply goods and render services in an innovative and efficient manner are bound to prosper and consequently the long term investors owning the shares of such companies are also bound to prosper through regular dividends received during the long period of investment and appreciation in the market price of the shares, on the back of growth in the ‘Earnings Per Share (EPS)’.

Compounding

The amazing results of compounding were discovered and propounded by Albert Einstein. The ‘Miracle of Compounding’ works only over long periods of time and especially the spectacular results start occurring at the fag end of the very long period. Being a natural law like any other law of physics it operates at its own pace as per its own nature – there are absolutely no shortcuts.

To conclude, one cannot consistently make a fast buck playing on the stock markets, but through disciplined investments one can build significant wealth over very long time.