There are only two ways to make money in the stock market, capital appreciation or income. The problem is that the first one gives you a dopamine hit, a feel-good factor and instant gratification. When you make £1,000 or £5,000 or £20,000 on a single trade in a week, it’s hard not to get a little giddy with excitement. You start to imagine doing that every week and before you know it, that becomes your new goal. It’s the quick fix that Foreign Exchange Traders and short term speculators are addicted to.
It’s the same rush that you get at the roulette table when your number comes in. The problem is that most quick profits like that are very few and far between.
It’s like running the 100m sprint. Sure, if you’re lucky enough to back Usain Bolt you will win that trade. But there are another 1,000 sprinters who are not Usain Bolt, and there’s a very good chance that you will back one of them before you back Usain. It’s the same with your stock selection. You are not going to pick the explosive stock winner each time. You’re going to pick Fred, who nobody has heard of, who is overweight, asthmatic, and smokes 40 fags a day.
That’s why income is far more important. The income is what gives you stability. That’s the marathon runner, the guy who looks at the big picture, the long term. Because here’s the thing. The marathon runner has a tail wind behind him. He has an advantage that the sprinter doesn’t have. He has TIME on his hands.
And as long he keeps running, he can’t lose. And as long as you keep holding that dividend paying stock, you accumulate dividends and so you can’t lose.
Sure, stocks can cut their dividends and even go bust but that can happy to any stock at any time. But the income at least gives you an extra line of defence. At least you have something to hold onto if things go wrong. It’s a get-out-of-jail card when you need it most.
If you always back Usain Bolt and never Mo Farah, you’re making a big mistake.
But the best thing that you can do is combine the capital with the income. Now you have Usain Farah – and what a team that would be!
MP3 Version: SMS 40