The 3-step secret to investing success


The simple way to build a small fortune, writes The Motley Fool

We’d like to share with you the story of a woman we’ll call Jean. She was an ordinary investor like you, but she went from being a pauper to being a millionaire.

Below we’ll talk about how you can do the same.

One woman’s story

Jean was born in 1905 on a farm in the U.S. Her father died when she was 11, and the family found it couldn’t manage the farm, so they moved to the nearest town, ending up among the poorest of its residents.

Yet, by the time she passed away at the age of 95, she had given her 15 heirs four tax-free gifts of $10,000 each and then passed on an estate worth more than $1 million. In other words, she gave away nearly $2 million.

How did she manage this feat? By working hard until the day she died? By pinching pennies so hard that she yelled in pain? Probably so, but she did more than that.

What Jean did was to invest in solid companies, steadily buying new shares and reinvesting the dividends all of her life.

You’re probably expecting us to talk about dividends, but we won’t.

Rather, we want to point out how Jean’s experience proves what Professor Jeremy Siegel of the Wharton School of Business showed in The Future for Investors: Investing in shares over the long term is the best way to build a fortune.

One example of fortune-building

Jean amassed her fortune by steadily buying shares of solid, long-term companies like ExxonMobil. They weren’t flashy, even then, but between early 1970 and 2000, an investment in ExxonMobil, including reinvested dividends, grew nearly 114 times.

Not only did Jean invest in great companies, but she kept investing into her 70s, her 80s, and on into her 90s, holding her investments for decades. Buying and holding was an important part of her success and it allowed her to enjoy a comfortable retirement.

The 3 steps behind her success

Her “secrets” are simple:

1. Find companies with a record of good performance — shown through solid earnings, free cash flow growth, and strong management — and likely prospects going forward, and then hold onto them for years.

2. Once you find one, buy shares consistently over time and reinvest the dividends. Rinse and repeat.

3. Do this for the rest of your life.

Using these steps today, an investment in one or more of the following companies, for example — and a plan to continue investing in them — could start you on your road toward becoming a millionaire.

Woodside Petroleum (ASX: WPL) both for its unparalleled oil and gas assets, its strong recurring revenue streams, and its exploration potential.

Seek (ASX: SEK) for its high profit margins and dominance of the online recruitment market, with over 140,000 listed jobs and 13 million visitors each month.

Coca-Cola Amatil (ASX: CCL) for its focus on bottling world leading beverage brands, and its access to over 265 million consumers in Australia, New Zealand, Fiji, Indonesia and Papua New Guinea.

Woolworths (ASX: WOW) for its huge brand, dominance of the groceries market, strong free cash flow, and repeat business.

BHP Billiton (ASX: BHP) for its diversified mining production and its exposure to the growth of emerging markets, especially China.

Putting one or three of those in your portfolio and following her steps to success is almost too easy.

Decades of boring wealth

Jean’s three steps should be familiar to all investors. Yet I suspect very few active investors actually implement them.

They are too caught up in making a quick buck or $50,000 to actually take a step back and realise they have decades to build their wealth, not days.

The moral of the story is simple, if not perhaps a little boring. Still, come 30 years time, I suspect you’ll take ‘boring and wealthy’ over ‘exciting and still looking for that one huge winner’.

Happy investing.

More reading:

Your 13 Steps To Financial Freedom

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