Value Investing – How long do you need to make 1 billion dollars? Let’s talk real numbers. Assuming you make 100K dollars annually, which is a pretty decent income. Let’s put aside concepts like inflation, interest rates, opportunity cost aside and just assume hypothetically how many years you have to work to earn 1 billion dollars based on the numbers we have today. If you have started working the day the United States declared independence in 1776. let’s assume that you were so frugal that you saved every penny and somehow survived without spending a single penny on anything.
You lived with your parents, only ate at home what your mama cooked. By 2021, you will have 24.5 million dollars saved in your bank account. Almost 250 years of hard work would not even put close to the billionaire’s list. Leave alone competing with the world’s richest people. Let’s be a little bit more generous and extend that time frame to 2021 years. How much would you earn if you had worked hard for the entire modern history? Unfortunately,
I have to disappoint you because you would only save 202.1 million dollars. That’s not even 1 percent of Jeff Bezos’s wealth, the world’s wealthiest person. Let’s put aside Jeff Bezos and figure out how long do you have to work to even be on the Forbes Billionaire’s list. To make your first billion dollars, you have to work and save every penny for 10K years. Yes, 10K years. Just for the record, human civilization is 12K years old.
This example should illustrate to you the difference between Bezos and someone making 100K dollars a year. Even if you make a million dollars a year, you still would be considered poor in comparison to what Jeff Bezos has accumulated in the 30 years. This example perfectly illustrates to us that even if you have all the time in the world, you still won’t be able to build wealth if you do not follow the rules of money. We have already made multiple articles about the rules of money, which you can go back to, but the question that many of you might have in mind is – do you really have to build a 2 trillion dollar company to be able to build that much wealth? The answer is no. take the example of Warren Buffett. He didn’t start a tech company or even was involved in the invention of any revolutionary technology.
All he did was find the right companies to invest in. But not all investors turn out to be successful. Most people lose money when investing in the stock market and most recently in cryptocurrencies, so the question is – what differentiates a successful investor from the rest? What is value investing, and Why all millionaires follow this particular rule? We will answer all of these questions and many more. But before we do that, make sure to give this video a thumbs up, and here is a little disclaimer – this is not financial advice, and everything that’s said in this video is for educational and entertainment purposes. And now, let’s dive in.
In the late 1990s, when Google was a tiny company. Sergey Brin and Larry page were desperately trying to sell google to a tech giant. Back then, Google wasn’t the conglomerate they are today. Google’s founders were more than happy to sell Google to Yahoo for 1 million dollars, but Yahoo declined their offer and didn’t see any value in Google since Yahoo was the internet back then.
Yahoo was what google is today, but a Stanford professor named David Cheriton saw the value in Google’s algorithm and invested 100K dollars in the company. Today his investment has grown to over 6 billion dollars. Instead of randomly buying stocks, he tried to find the value behind the company and bet on the long run and turned $100K into 6 billion dollars.
The Value Investing Rule
That’s what value investing is. If you take a look at any company that Warren Buffett, Charlie Munger, or Peter Lynch have invested in, you will see the same pattern. Buffett looks for companies that are so valuable that he can buy the stock and forget about it for the next 10 years. Think of Coca-Cola, Gillette, and even Apple. He doesn’t intend to sell any of his stocks. Some people doubt his investing abilities, but the fact that he built a 100 billion dollar fortune simply by picking up the right companies to invest in says a lot about the power of value investing.
Value investing is picking up stocks whose values are a lot more than what they are trading in the market. Back in 2016, Warren Buffett clearly saw that Apple is such a powerful brand that they literally sell anything they want for a much higher margin than any other tech company. And in the last five years, apple’s valuation tripled.
Most average investors choose a stock based on how popular the stock is or who’s promoting it without really understanding the underlying technology behind it. People have dozens of stocks in their portfolios, but if you ask them what they really know about the companies they have invested in, they barely know anything real.
There are a lot of passionate Tesla investors, for example, on the internet who are calling people like Warren Buffett fools who don’t invest in Tesla. They read short statements of Cathie Woods, who claims that Tesla is at least worth 3K dollars per stock. Tesla is going to produce Roadster 2 that’s going to be faster than Bugatti and yet only cost 250K dollars. Tesla Semi Track is on the way. Tesla is going to create an app that will compete with Uber. Tesla is going to create 100 GIGA factories that will produce enough cars to replace every car in the world.
Do you see the problem with that? Despite the fact that I admire Elon Musk for everything he is doing, especially with SpaceX, he has created so much hype around Tesla that people treat Tesla as if it already has done all of that when in reality Tesla roadster has been postponed to 2023, the semi-truck that was introduced in 2017, 4 years ago and its not yet on-sell, its Giga factories in China and Germany are facing regulation problems.
I am not even talking about the Tesla app that will compete with uber or Level 5 autonomy that Musk has been promoting for the last I don’t know how many years. Instead of completing any of these projects, Tesla came out and announced the Tesla Robot and how it’s going to revolutionize the world and replace humans. The world goes wild. Immature investors quickly buy Tesla shares when that robot is really just a human dressed as a robot and performed a creepy dance, while Cathie woods, the woman who claimed that Tesla stock worth at least 3K dollars, quietly sells 110 million dollars worth of Tesla stock. Let me ask you a question: let’s say you have a tv today costs 740 dollars and 100 percent confident that in a year or 2, this TV will cost 3K dollars.
Would you sell it today? Of course, No, why sell it now when you can it sell 4 times that price a year later. Or maybe you don’t really believe in what you are saying. Value investing is the absolute opposite strategy. It’s not about running behind what is cool or what’s trending. If it’s already trending, then you are most likely late to the party. If you know the true value of something, you can save a lot of money when you buy it on sale.
Most people would agree that whether you buy a new TV on sale or at full price, you’re getting the same TV with the same screen size and picture quality. Stocks, like TVs, go through periods of higher and lower demand leading to price fluctuations—but that doesn’t change what you’re getting for your money. If a stock is worth $100 and you buy it for $58, you’ll make a profit of $42 simply by waiting for the stock’s price to rise to the $100 true value. On top of that, the company might grow and become more valuable, giving you a chance to make even more money.
If the stock’s price rises to $130, you’ll make $72 since you bought the stock on sale. If you had purchased it at its full price of $100, you would only make a $30 profit. Of course, there are some fundamentals you have to look at before buying a stock, like the balance sheet, cash flow, income statement. Do your ratio analysis to find out how does it compares to its competitors and how cost effetely they are using their resources. However, that’s not enough to find the true value of the company.
Value investors look beyond these numbers, such as the people who ran the company, the values, and principles the company is following. At the end of the day, what is a company? It’s a group of people who came together to create a product or a service and based on how creative, disciplined and organized these people are, the more successful the company is going to be.
That’s why before investing in any company, Buffett usually meets with the management of that company to find out who really runs the company. If you can’t do all of that, then you probably shouldn’t invest in stocks. In an experiment that was done by Princeton Professor Burton Malkiel, blindfolded monkeys throwing darts at a newspaper’s financial pages selected a better performing portfolio than mutual fund experts. Yes, monkeys who know nothing about the stock market outperformed experts with Fancy MBA degrees and years of experience, which says a lot about our ability to pick up individual stocks.
That’s why Warren Buffett said: most people would be better off investing in an index fund like the SP500. That’s not to say that you shouldn’t invest in individual companies. You can if you know how the company operates if you’re familiar with the products and deeply understand the company’s philosophy. If you want to learn the fundamentals of the stock market, how to read financial statements, or do your ratio analysis, you can check out my course on Skillshare.