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Weekly Q&A: Investors Ask, Clement Answers #7
For week 7, Clement addresses the topic of share classes, deciding what stocks to invest in, and whether or not you can strike it rich in the stock market without relying on luck:
Why Do Companies Have Two Classes Of Shares?
It’s a matter of voting rights. I’ll explain.
Let’s take Alphabet as an example. As you may know, you can buy two types of Alphabet stock - Class A (NASDAQ:GOOGL) and Class C (NASDAQ:GOOG). There is also one type of shares you can’t buy, one that only the founders hold - Class B. So in fact, Alphabet has three different types of shares - two publicly traded, and one privately held.
The difference between them is the shareholder’s ability to vote on company matters when shareholders are asked to make decisions.
One Class A share equals one vote. One Class B share equals 10 votes, while Class C shares don’t get to vote.
The reason things are structured this way is to ensure founders always get a say in the direction of the company, as it protects them from being overruled by a third party.
Originally, Alphabet Class C shares did not exist, and when founders wanted to sell Class B shares, those would transform into Class A share. But as the founders voting power was diluted, Class C shares were added in 2014 to preserve the voting power of Alphabet’s founders, Sergey Brin and Larry Page.
How Do You Find Stocks To Invest In?
There are a few ways to find stocks to invest in.
- Stock Screener
A stock screener is great to find stocks that fit your investment thesis. For example, if you decide you want to buy value companies, a stock screener can help you find stocks with the P/E ratio you’re looking for, the performance you’re looking for, etc.
- Investing communities
There are many interesting communities to join, to exchange ideas with people and find investment opportunities. http://Investing.com is one of them, and the vibrant discussion boards are where people exchange investing and trading ideas. Twitter also works.
- News
When something big happens, there is often money to be made. A CEO change, a scandal, all affect the price of a stock and automatically puts them in my watchlist.
Eventually, the more you immerse yourself in the stock market and investing world, the more things just jump at you, and you realize opportunities are everywhere. It’s hard at first, but read, analyze, talk to people, and you’ll have more opportunities than you can take advantage of pretty soon.
Can You Become A Millionaire In The Stock Market Without Getting Incredibly Lucky?
Yes, with the power of compound interest. Compound interest is the ultimate example of how slow and steady wins the race.
Everything that comes below is hypothetical, does not take into account dividends, or taxes, or many other things that affect the final outcome. It’s a mathematical exercise to prove that becoming a millionaire is possible, given a long enough investment horizon.
Of course, some luck is still necessary. You need to be able to keep this money invested and not need it for an emergency, and humanity needs to be able to avoid a nuclear war or a meteor hit.
That being said - say you start with a relatively modest $10,000. You invest those $10,000 in an index fund, that does, say, 7.5% a year. The average annualized total return for the S&P 500 index over the past 90 years is 9.8% - so we are setting a reasonable expectation of yield.
Every month, you set aside another $100, and you add it to your investment.
After a year, you’ll have $12,040. Not very impressive. But look what happens on a longer time frame, if every year you reinvest your gains:
- After 3 years: $16,590
- After 5 years: $21,850
- After 10 years: $38,860
- After 25 years: $148,000
- After 40 years: $473,000
- After 50 years: $1,000,000
Do you see the exponential growth? That’s compound interest for you. In 50 years, with little luck involved, you can grow $10,000 + $1,200 annually to $1 million.
By the way, the same calculation with the historical 9.8% yield gets you to $2,500,000 after 50 years and makes you a millionaire in 40 years.
I’ll say again that everything above is hypothetical, a math exercise. But don’t underestimate compound interest, and start investing as early as you possibly can - slow and steady can make you a millionaire.
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