Have you ever wondered why the rich get richer and the poor get poorer?
Whether you believe me or not, becoming rich isn't about how much you earn, it's about what you do with your money. Below I'll prove it to you…
But first, consider this.
From Berkshire Hathaway Inc. chairman and multi-billionaire Warren Buffett down to your local butcher, everyone has their own theory on investing…
But there have been fewer greater theorists than Albert Einstein.
The German-born theoretical physicist who is famous for the mass-energy equivalence formula E = mc2 (among many other things) once said: "Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn't…pays it."
Basically he believed that by making your money work for you, the possibilities are endless…
However not many Australians are harnessing its true potential. As another physicist, Albert Allen Bartlett, believed: "The greatest shortcoming of the human race is our inability to understand the exponential function."
Too many Australian investors try to weave their way in and out of the stockmarket and, by doing so, completely miss the ability to make exponential growth on their stock portfolio.
For example, imagine if you bought a stock for $1.00 per share 20 years ago, when it paid a five cent dividend. Say that same stock grew its earnings and dividends by an average of 10% per annum from the day you purchased it, until now.
Your stock could now be worth an impressive $67.00 per share and would payout $3.35 as an annual dividend. That's equivalent to 335% of your initial investment every year, just in dividends!
What's more, if the stock climbed 1% in a day, your profit and loss account would show an increase of 67%!
"So how can I achieve a 10% return on my stock portfolio?" I hear you say.
Well, I think you have two options. You can either invest in a low-fee index fund or buy individual stocks in your personal portfolio. I prefer the latter.
Four stocks which I believe have shown their ability to grow exponentially over time and pay big dividends (which can be reinvested or taken as cash) are Coca-Cola Amatil Ltd (ASX: CCL), M2 Group Ltd (ASX: MTU), Rio Tinto Limited (ASX: RIO) and Ardent Leisure Group (ASX: AAD).
Each are well priced and produce services or products which will still be around in 20 years' time.
The Motley Fool's 10 Steps to $1 million
The rich get richer because they make smart investment decisions with their money. Over the course of his life Warren Buffett has proven how ordinary people can become extraordinarily rich by investing in the stock market.
