Here’s another way I like to think about stocks. I like to think I am buying money machines.
Wouldn’t it be nice if you could go down to Wal-Mart and pay $49.95 for a money machine. And you could buy as many of them as you wanted. Maybe every week you bought another one. That’s fifty-two money machines in a year.
You just set the little money machines in the closet and forget about them. And every three months they would dump $.50 on the floor. That’s a little over four cents a week per machine.
So the first week you’d have 4 cents, the next week you buy another so you have two machines so you would get 8 cents that week, the next week three machines so you’d get 12 cents, on and on for fifty-two weeks. At the end of the first year you’d have over 5700 pennies just laying all over the floor. What a mess. But that’s a $57 mess.
Now you could spend that $57. Or here’s a thought. You take most of that $57 and buy one more money machine. Why not, it’s paid for. The other money machines bought it for you.
Now you have 53 money machines sitting in the closet. But it gets better. Because maybe next year all of your money machines start dumping out a little more money than they did last year — let’s say $.55 at a time instead of $.50.
At the end of the second year you’d have 11236 pennies laying all over the floor. That’s over $112. Now you can buy two more money machines. And the machines keep on increasing how many pennies each one puts out by a little bit each year.
And we haven’t even talked about the fact that the price of the money machines goes up, so the ones you own are worth more now. Maybe they are all worth $55 instead of the $49.95 you paid for them.
That’s how many stocks work.
Interestingly, a share of Wal-Mart stock would cost about as much as our example and dump that much money on your closet floor.
So let’s think about this for a minute. You can go out and spend your money on a new car, which is worth less as soon as you drive it off the dealers lot. And it costs you money to drive it.
Or you can go buy a nice dinner at a restaurant, which is gone as soon as you eat it.
Or you can buy money machines.
Nothing against new cars and nice dinners, I like them both. I’m just saying they lose value over time – rather quickly.
But your money machines dump out a little bit of money every three months, year after year and they become worth more over time.