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The Two Ways You'll Get Rich Investing

By Porter Stansberry
Thursday, September 27, 2007

It was the proverbial "ton of bricks." The light bulb. A moment of tremendous clarity.

I was exchanging e-mails with my old friend Chris Weber a few days ago when it hit me... I sat there, and the idea resonated in me. It was almost a physical experience. I felt as though it was the culmination of thousands of hours of thinking. If you've ever worked for years trying to understand a puzzle or unlock a mystery... you would know how I felt.

Chris Weber, if you've never heard his name, is one of the greatest investors of this generation.

Chris began investing, at age 16, with the money he'd saved from working a paper route. Chris was an unusually astute and well-read 16 year old. He'd read Harry Browne's book about the coming dollar devaluation. He understood what the breakdown of the Bretton Woods agreement meant for the future of commodity prices – especially gold. So, when private ownership of gold was legalized in 1974, Chris started buying gold coins. Before long, he was buying gold futures.

He'd discovered the bull market in gold, and he was wise enough to hang on until the very top.

By the late 1970s, he'd made a small fortune. And what he did next would make him truly wealthy. In 1981, Chris bought long-term government bonds, which were yielding 14%-16% at the time.

Imagine your wealth compounding at double-digit rates in government bonds. If you were making that much money in bonds, you'd be very reluctant to buy anything else. You'd be a very skeptical investor, only interested in the most extraordinary opportunities. Chris made enough money with his investing that he's never had to get another job, though he's worked through the years in various related endeavors, like writing investment newsletters and managing money.

And last week, Chris helped me understand the apparent incongruity of my approach to investing. Let me explain...

On the one hand, I've always been fascinated with new technologies and new trends. I recognized early in my career that buying small companies that are creating huge new markets was a certain path to wealth. But on the other hand... I'm drawn to the mathematical certainty and the numerical elegance of safe, deep value investing. The attraction to both types of investing seemed a contradiction.

But recently, Chris explained why I'm drawn to both sides of the investment ledger...

"There are only two ways people become wealthy investing," he said. "You can compound your savings over a long period of time, or you can buy into the early stages of major bull markets."

I'd never thought about it so clearly before. Chris' very simple explanation is exactly right. To grow wealthy as an investor, you've got to be able to do two things well.

First, you must understand the power of compounding. You must have the patience and fortitude to allow most of your capital to compound over a long period of time. In all truth, compounding returns combined with steadfast saving is the only reliable way to become wealthy as a passive investor. This is how the banker gets rich: He understands interest is something that should always be collected, never paid.

Second, you must be cognizant of long-term trends – particularly fundamental changes in technology and certain changes in the global macroeconomic environment. Using your knowledge, you must invest early in long lasting trends... and have the patience to stick with it.

I went through my own personal portfolio with these ideas in mind... and I realized I was mostly speculating in situations where a new bull market wasn't emerging. Whether I would make money or not didn't really matter... I wasn't invested in the long-term, big bull markets that would multiply my capital several fold. Likewise, I hadn't set up my safer investments so that they'd automatically compound.

Look at your existing portfolio. How many investments do you own that are designed to compound your wealth? How many investments do you own that are designed to increase your capital? I'd recommend you follow the 80/20 rule... and keep 80% of your money in investments that will safely compound your existing wealth. Put the rest to work in major bull markets.

Good investing,

Porter Stansberry

Market Notes


There are other emerging economies besides China… though sometimes that's hard to remember.

The hype surrounding China is well founded... the market has gone berserk. The iShares FTSE/Xinhua 25 ETF (FXI) is up 117% in one year. But Brazil, China's BRIC (Brazil, Russia, India, China) counterpart, hasn't exactly languished over the same period. An investment in iShares Brazil (EWZ) would have doubled investors' money as well.

Just yesterday, Brazilian industries from steel to mining to meatpackers hit all-time highs. Brazil's currency, the real, has gained 15.6% this year, second to only the Canadian dollar among the 16 most actively traded currencies tracked by Bloomberg.

China's run is getting a little long in the tooth, and there is some talk of a bubble. Until Brazil steals the spotlight and bubble rumors arise, investors should continue to profit in this South American economy.

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