If you are looking to put some money away for a rainy day or save for retirement it would be nice to have that money work for you as well. The stock market is often touted as the best place to put your money and have it earn a profit. But just how profitable is stock investing? In the stock market quality begets profits over the long term. This is the world of buy and hold investing. In the short term research into specific stocks can lead to tidy profits which you often will want to take back out and turn into cash. This is the world of buying low and selling high. In regard to investing in stocks Investopedia writes about five stock market myths that can lead you astray.
The laws of physics do not apply in the stock market. There’s no gravitational force to pull stocks back to even. Over 20 years ago, Berkshire Hathaway’s stock price went from $7,455 to $17,250 per share in a little more than five years. Had you thought that this stock was going to return to its lower initial position, you would have missed out on the subsequent rise to $170,000 per share over the years.
We’re not trying to tell you that stocks never undergo a correction. The point is that the stock price is a reflection of the company. If you find a great firm run by excellent managers, there is no reason the stock won’t keep on going up.
How profitable is stock investing?
If you had purchased 100 shares of Microsoft at $21 a share in 1986 when it went public your $2,100 investment would have turned into 28,800 shares after stock splits, be worth three quarters of a million dollars and be paying $41,472 in dividends each year.
If you had bought one “A” share of Berkshire Hathaway in 1990 it would have cost you $7,100. Today it would be worth $224,000.
There are other examples of investment “home runs.” In general strong, well postioned and well managed companies continue to make money and grow year after year. However, there comes a time when their market is saturated and profits plateau. That is why getting into these stocks when they are new and cheap or are cheap due to temporary economic factors is a good way to see the best profits. This is the world intrinsic stock value.
In the aftermath of the stock market crash of 1929 in the early days of the Great Depression Benjamin Graham introduced the concept of value investing. No longer would those buying and selling stocks need to act like they were at the casino. With the concepts of intrinsic value and margin of safety Graham taught investors a rational means of investing in stocks.
Read the article for the formula. The point is that you can find and purchase stocks that are selling below their value to you as an investor. These stocks will make money over the years. Their stock prices will rise as the market catches on. And many will be or become dividend stocks that provide you with a nice quarterly cash payment.