How to get rich in the stock market
Use other people’s money
Yesterday was the first trading day of the month. And as I do every month, I bought stocks. But I used other people’s money to buy my stocks.
USING OTHER PEOPLE’S MONEY
Other people’s money? How is this possible? The answer lies in the first article I ever posted on Medium
DIVIDENDS PAY FOR MY STOCKS — AND MORE
In other words, the money I used to buy stocks — dividend paying stocks, mind you — were purchased using money I received from dividends. Other people’s money, pure and simple.
HOW I ACHIEVED FINANCIAL INDEPEDENCE
This is how I achieved financial independence in 2002. First a little background.
I started working on Wall Street in the late 1980s as a Quant. Being on a trading floor, surrounded by Quants and Analysts and Traders, I too, naturally assumed I could trade.
It was a disaster, for many reasons, most of which was trading is full time job. Enter into a position and you simply have to monitor it. Even if you set stops — which cost money, mind you — you still have to pay attention, lest something systemic happen.
TRADING IS A FULL TIME JOB
So you need to pay full time attention to your positions in the market. Unless, of course, you’re trading with chump change, taking positions worth a few hundred or a few thousand dollars. And if (big if) you manage to generate a profit, you have to pay either short term or long term capital gains taxes.
A HAPPY ACCIDENT
I accidentally learned about dividend investing when I had an open position that exploded upward after purchase. When you work for an Investment Bank you can’t buy or sell without permission from the compliance department. They rapidly approved the purchase, but took about two weeks to approve the sale — the bank was doing other business with that company by then, and needed to avoid possible charges of conflict of interest. Before they approved my sale the stock cratered and I took a significant loss on that position.
AND AN IDEA
But a money market fund I used to park cash in paid me, as it did every month, and that gave me an idea: what if I deployed all of my capital in assets that paid dividends?
FAILURE IS THE BEST TEACHER
I started to research dividend paying stocks. I experimented taking positions, seeing what worked, and what didn’t. I learned the most from my failures.
My undergraduate education — which landed me my job as a Wall Street Quant — was in math and computer science. Later Deutsche Bank paid for me to take an MSc in Quantitative Finance. A few years later I took an MBA, and completed all classes for a PhD (ABD presently), again in finance. I seriously refined my strategy for selecting divided paying stocks.
And since my tax situation is fairly complex — I live abroad, own assets in three countries and also own a fairly large property company — I’ve learned a great deal about how to reduce taxes I have to pay on dividends.
A POSITIVE RETURN WITHOUT THE WORRY
Dividend paying stocks allowed me to get a positive return on my investments, but without having to worry as much as I’d have to if I were trying to time the market, buying low and — hopefully — selling high. All without needing the permission of Compliance, of course.
By 2002 my portfolio was earning as much as my base salary as a Vice President of Global Risk Management at Deutsche Bank. It took me a few more years but I finally left Investment Banking to do a job I really love — teaching Finance and Fintech at the Masters level. For years I followed a very simple formula — every month I would take 25% of my net pay, combine it with all dividends paid over the previous month.
THE POWER OF COMPOUND INTEREST
And buy more dividend paying stocks. This is the power of compound interest, but working for you.
A common misconception about dividend paying stocks is they have a low yield. If you use a simple stock screener such as the one offered by Yahoo Finance you can see yields can range from almost zero to well over twenty percent or higher.
ONE HIGHER RISK ONE LOWER RISK
I have two portfolios, taxable and tax-free. I take more risk in my taxable portfolio, and currently it yields 14.29% (15.27%) on invested capital. The tax free portfolio contains my retirement savings, presently it yields 6.36% (6.55%) on my invested capital. Each pays monthly, so the figure in parenthesis represents the annualised yield.
Dividend paying stocks attract taxes but dividends are much more reliable than the promise of capital gains. Think about it this way: companies can only influence their share price. But they have absolute control over their dividend. And companies are loathe to cut dividends.
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