Comfort Zone Investing: Why Aren't You Rich?

Done correctly means: conservative investing, always taking the more solid investment over speculative ones. It means dividends as well as capital gains. It means diversity over many industries with holdings of only the strongest companies. It means owning stocks that have ever increasing earnings, no matter what the economy does. It means being patient, riding out the shocks that life brings, knowing that eventually there is a natural human instinct that wants a better life. That means improving one's home or car or wardrobe or boat or any other thing that makes an individual happy. When that spending occurs, businesses thrive, profits go up, stocks increase in value. Human nature is a powerful force.

So that's the prescription for people who want to be rich after several decades of investing. But it's not the only way to be rich. The next way is much more typical of young people who have more money than most or older people who have more money than most. Their secret is this: they took a large gamble and won.

By that I mean they focused on one investment and didn't waver. For Warren Buffett, one of his first and largest investments was Geico Insurance. He bought millions of shares and very little else. He didn't diversify his holdings. He simply did his homework, saw what a great bargain the stock was, how well managed the company was, and bought all the shares he could afford. He did the same thing with Washington Post. If you look at his portfolio of stocks now, it isn't all that large. With the billions he invests you would expect many hundreds of different stocks. But that isn't his way. He believes in finding great stocks (and there are few of those) and buying as much as he can, then being patient.

Or look at Donald Trump (well, squint at him anyway, because that hair is a little too much). He's another example of extreme wealth provided by an intense focus. In his case it was real estate. Initially only New York real estate. Of course, he had a great start from his inheritance, but he built on it, leveraged it, and became more knowledgeable about Manhattan than any other investor. He's not successful because he's lucky. He's been successful because he's focused, took a gamble and won.

More examples: Bill Gates (Microsoft), Larry Ellison (Oracle), T. Boone Pickens (oil and natural gas), the Walton family (father Sam focused on retailing), Larry Page (Google), Sheldon Adelson (gaming), Michael Dell (Dell). Forbes lists 400 of them each year. Every one has been focused on a specialized investment.

Many investors have taken lots of gambles, and they're still poor. That's because they didn't do their homework well enough, or they weren't patient enough, or in the case of real estate, didn't add enough value to a property to warrant a higher price. For stock investors, that first mistake (not doing enough investigating) is the most common.

They hear a hot tip from a TV or radio head screaming about the newest, greatest, best ever company and immediately buy it, never look it up or analyze it. They simply buy something and hope. That's not the way to get rich. It's the way to get poor. Doing due diligence is required. It's what you don't know that will kill you in investing. If you don't understand your investments, you can't make the right decisions as to when to buy or when to sell.

That's two ways of being rich: the slow and the fast ways. The third way is maybe the best. It has to do with being grateful for what you have, every day, feeling the riches that we all share in the United States. It's a feeling you can have, no matter how much money you have or how much money you owe.

It doesn't mean you don't strive to have a better life, as you define it. In fact, getting rich doesn't mean you want things. It may mean you want more money to give to others, maybe one of the best feelings there is. It may mean you can help your relatives or best friend. Or it may mean you can finally buy a new car, or a good used one.

Whatever your goals, being rich makes it easier to attain them. And if you keep your goals well within your income level, you'll always feel rich. But if you want to short cut the process, hit the jackpot early, you have to take risks and be ready to reap the rewards or suffer the catastrophes. Or you can take it nice and slow, be grateful for what you have, and work hard for your goals. Then you can feel very, very rich indeed. Every day.

Ted Allrich is the founder of The Online Investor, chairman of the board of Bank of Internet USA, as well as the author of the book Comfort Zone Investing: Build Wealth and Sleep Well at Night. In this weekly column, he offers advice to investors who are just getting started.