The Motley Fool

3 secrets to long-term wealth creation

Getting rich quickly from investing in shares is far from common – in fact I’ve never met anyone who has become a millionaire overnight. It’s just not that easy and why should it be? Just like any other job – is the way you should approach investing – hard work, lots of experience and many years of perseverance is ultimately the way to riches.

In fact, rather than thinking of the share market as a place to ‘get rich quick’ consider it a place where you can get really rich, slowly!

While the portfolio holdings of many of the most successful investors are often unique with limited overlap there are certain fundamental traits which many of these same investors share.

Firstly, they buy shares in quality companies. The types of stocks which they love to buy (when the price is right) are market leaders which have pricing power such as Woolworths Limited (ASX: WOW) and Telstra Corporation Ltd (ASX: TLS).

Secondly, they buy with a margin of safety. It’s impossible to get every investment decision right and rarely does overpaying for a stock lead to a good investment return, so while a stock such as Domino’s Pizza Enterprises Ltd. (ASX: DMP) may be a great business, well managed and have strong growth prospects, successful investors would be very wary of paying the current price for Domino’s preferring instead to wait until an obvious gap between price and value can be observed.

Thirdly, they are risk averse. While diversification is one way to reduce risk, successful investors take their risk aversion to a deeper level. As Warren Buffett likes to say: ‘Rule number one, don’t lose money. Rule number two, don’t forget rule number one.’ Reading comments by successful investors such as Kerr Neilson at Platinum Asset Management Limited (ASX: PTM) highlights how first and foremost successful investors worry about the downside risk before they consider the upside potential.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.