It is common knowledge that you need money to make more money. At the beginning, when most people look at the paltry sums they have to invest, they ask themselves what’s the point. This is the biggest mistakes most people make. They do not think small amounts can make a difference. But a change in mindset is required. For everybody starts small.
When it comes to saving and investing, even the smallest of amounts can make a difference. The biggest misconception people have is that they think they have to start with an entire Napoleon-like army. They suffer from the “not enough” mentality; namely that if they aren’t making £1,000 or £5,000 investments at a time, they will never become rich. What these people don’t realise is that entire armies are built one soldier at a time; so too is their financial arsenal. So even if you have £250, my opinion would be to start investing and to add to that investment over time.
Just look at the greatest investor of all time, Warren Buffet. He started out his investment journey by buying 6 shares in Cities Services together with his sister. Most people would look at the small initial outlay of $228 and think to themselves ‘this amount won’t make a difference to my net worth.’ But not Buffet. And even though he only made $2 a share profit on Cities Services, and only increased his money by $12, he didn’t quit.
Buffet understood money. He knew the power of compounding. He knew that small wins over a long enough time horizon could make a hell of a lot of difference. An important reason Buffet became the richest man in the world is because he started young. He didn’t have the ‘not enough’ mentality. He knew even the smallest amounts compound greatly over time.
If Buffet simply waited 15 more years till he was 25 to start investing and till he had the capital, I doubt we would have heard of him. He wouldn’t have close to the amount of money he has today. It is estimate that $87 billion of Warren Buffett’s $88 billion net worth was accumulated after his 50th birthday. Eighty-four billion of the $88 billion came after he qualified for Social Security, in his mid-60s.
When it comes to investing, just start. Don’t worry about the amount of capital you have today. Buffet has proved that a small amount compounded over time can achieve big gains. It is not easy to comprehend, how powerful it can be to take something small and hammer away at it, year after year, without stopping. This process of compounding from a small base is easily overlooked. And because of this, we miss the key ingredients of what caused big things to get big. How can most of Buffett’s success be attributed to what he did as a teenager? It’s so crazy, so counterintuitive. And since it’s crazy and counterintuitive we overlook the right lessons. So we write 2,000 books on how Buffett sizes up management teams when the biggest and most practical takeaway from his success is, “Start investing when you’re in third grade.”
So start investing as young as you can without the worry of stumping up thousands to throw in the markets. A hundred here, a hundred there should be enough of a starting amount. But make sure you are consistent. Grow that money over time. Let compounding do the heavy lifting. That is how every great thing begins.
Here is an excerpt from Ian Cassel over at the wonderful microcapclub blog.
“As a small retail investor just starting out, success might seem like an insurmountable challenge. Even Charlie Munger is quoted by saying, “The first $100,000 is a bitch”. He is right, the first $100,000 – $200,000 – $500,000 is a real grind, but that is when you learn the hard lessons. The knowledge you gain in those years will give you the expertise to make $1 million – $2 million – $5 million a whole lot quicker. Investors generally overestimate what they can do in the short run but greatly underestimate what they can do over a lifetime. There is no reason you can’t make $10 million, $20 million, $50 million or more starting with a very small amount of capital. Other investors have done it, and there is no reason why you can’t either.
When I was on my own and trying to build a capital base, I watched every penny. I was a scrooge. I viewed one dollar I spent as ten dollars I wasn’t going to have in a few years. I got very efficient with eating, buying clothes, etc. My extravagance wasn’t going to the pub and spending $40 on beers and dinner, it was going to Taco Bell and spending $2.48 (yes I still remember) for two beef baja chalupas for dinner. I remember being able to make ends meet on $1,080 per month. You do what you have to do during these crucial capital building years.
New investors like to use the excuse of lack of resources for not getting started. They say, “I don’t have enough money, I don’t have 6 trading screens, I don’t have the right screening software, I don’t have the right technology, I don’t, I don’t”. First, stop using words like Can’t, Don’t, and Won’t. Losers use these words. The truth is you will learn far more without these resources because it will force you to be resourceful. The only resource you need is between your ears.
Be patient. You can’t become a great investor overnight because the most important lessons can’t be taught. They have to be experienced. You are going to make mistakes and lose money. You might lose most of your money a couple of times, like I did, but that is how you learn. Every time I took a loss I never doubted I was going to make it back. In most cases you need to fail so you know what will work the next time. Failure is often the first step toward success. Some of my best investment decisions were right after a big loss. I found that the loss (failure) often times refocused me on what was important and it honed my skills. “