Investment Myths: You Need A Lot Of Money To Invest

 

A very common myth is that  “you need a lot of money in order to start investing” (or to start investing on your own).  This is usually heard from those who don’t actively invest on their own, or from mutual funds who ask a minimum $5000 of your money. However, this myth is probably the furthest from the truth!

 

Knowledge Is Needed, And A Little Bit Of Money

Money is just the physical resource that you would use when investing. Knowledge is the key, and it’s what you really need in order to start.  The former without the latter is just a recipe for losing a lot of money.  The real barrier to investing is knowing how to find value & opportunities that exist.  Knowledge allows you to get past that barrier to make a profit with any amount of money, big or small.  It enables you to grow a small sum of money into a much larger one.

 

 

Growing A Small Sum Of Money Using Knowledge

Many great investors are able to grow their capital base over many years.  How is this possible?  They are able pick a greater number of good investments than bad ones.  It’s knowledge that allow them to do this starting from a small sum of money. Why not follow their lead and start small?

I also started investing with a small sum of money, twice.  After losing all of my money during the tech bust the first time (namely from Nortel stock), I had to start from $0 again.  I realized that I knew very little about investing, so I started reading books on the subject.  I saved up a couple hundred dollars, and started investing once more.  The difference was that I had knowledge the second time around and was better able to assess risks, find undervalued investments, and multiply returns in an increasingly consistent manner. A lack of cash didn’t stop me from getting started, and it shouldn’t stop you either.

Lottery winners are fortunate enough to find themselves in a situation with millions of dollars, but unfortunately most don’t have a clue what to do with it.  The majority of lottery winners end up back to where they were financially, prior to winning the jackpot.   They had the physical resources (a lot of money), but didn’t have the knowledge to grow and preserve the capital.

 

Knowledge Vs Lots Of Money

Most people would argue that you require much more than $1000 in order to start investing.  But let’s look at two simple examples of what an investor could have done with $1000 assuming they had the knowledge to pick undervalued investments at the time of purchase:

–  A $1000 investment in Rubicon Minerals [RBY/RMX] made in 2006 at $0.60/share listed on the NYSE would have bought 1650 shares (after subtracting $9.99 brokerage fee/commission) .  Rubicon was a relatively unheard of gold exploration company. The closing price on Monday (July 9, 2012) was $3.08.  The 1650 shares (minus brokerage fees) would now be worth $5072, a staggering 407% return!

– A $1000 investment in Walt Disney Co [DIS] made in August 2011 at $33/share would have bought 30 shares (after fees).  Disney was considered a boring and forgotten dinosaur compared to the likes of fast growing companies like Apple or Facebook. The closing price on Monday (July 9, 2012) was $48.00.  The 30 shares (minus fees) would be worth $1430, a handsome 43% return!

 

Most people would consider $50,000 a very large sum of money that would be enough to start investing with as well as to earn you a good return.  Let’s look an example of what an investor might have done with the large sum of money without knowledge, if they blindly followed recommendations and invested in a popular, but overvalued stock:

– A $50,000 investment in RIM [RIMM/RIM] in March 2010 at $75 on the NASDAQ,  would have bought 666 shares (after fees).  At the time, it was recommended by financial advisors, magazines, fund managers on TV, etc, as a great stock to have in your portfolio. The closing price on Monday (July 9, 2012) was $7.67.  The 666 shares (minus fees) would be worth only $5098, a gut wrenching 89% loss!

 

Knowledge Is The Only Barrier To Investing

In most domains, knowledge is always the necessary requirement, before physical resources are even considered.  The requirement for building a house is proper home-building knowledge, not having a large quantity of building materials.  With knowledge but less materials, you end up with a smaller house.  With the opposite, you end up with a larger pile of collapsed rubble.

The idea is the same in investing.  The mandatory minimum amount of capital that you really need is enough to cover the brokerage fee (typically $9.99) for any purchase and $0.01 for a single share of a penny stock.  You are limited to what investments you can make (any stock priced at $0.01), but you can still invest.  Starting with just $10 illustrates the idea, but it isn’t the most practical way to start. However, a few hundred dollars is very realistic. The only real barrier to investing is knowledge, and with the explosion of the internet it has never been easier to obtain it!

Now, I know some of you are going to say….. “Okay, so you don’t need to start with a lot of money.  But it’s easier to make money with more money”.  Well, I’ll leave that myth for next time!

 

FULL DISCLOSURE: I am long Disney and Rubicon Minerals.  I do not intend to buy/sell any of the above mentioned stocks within the next 3 trading days.

Thanks & Happy Investing! — The Investment Blogger © 2012

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5 thoughts on “Investment Myths: You Need A Lot Of Money To Invest

  1. I know this site is more focused on longer term, but what about shorter-term trading? Sure, both the activities have the same objective of making profits but with trading you most likely will have to have more money and skill to break even. Just a thought I had from an all-around buy and sell perspective.

  2. This is great advice for anyone – both seasoned pros and new investors. As an investment advisor, this is exactly the sort of information I try to impart to my clients. Glad to see someone has written it out so clearly and eloquently.

  3. Great review. And now start the hunt for the Crystal ball to find another Rubicon. Man, how did you find the company? I remember having a few companies like that as well. Many years ago I bought IBM when it traded at 26 a share, now 190 a share (but I wasn’t patient enough to hold, so I missed this run), Visa – I bought at IPO at 44 a share, now 135 a share and again I didn’t hold long enough to make this run… Lessons for the future… Great article.

    1. Thanks for the comment Martin, nice to hear from you again! I still like Rubicon’s assets, and they still have some ways to go before reaching a production stage. They’ll likely get bought out before then or shortly after IMO. I still hold quite a bit of Rubicon, but less than I did earlier on. I’m big into McEwen Mining, formerly US Gold Corp, and Minera Andes, both of which I held previously and liked as separate entities. Though I did like it when Rob McEwen bought into Minera, and then later merged them. He’s taken both those companies much further than Rubicon with great assets as well. Though a lot of patience is needed for companies like these. I tend to avoid IPOs, because not enough information is provided for me to make a valuation of the company. I didn’t buy any of VISA or MasterCard, but the stocks did extremely well. Both are overvalued now. Have you taken a look at AXP (AmEx)? It’s very undervalued, and has good growth prospects. Problem with VISA and MC, virtually no distinction between the two, almost to the point of being generic. With AmEX, it has distinctive competitive moat and & branding. I am long AXP.

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