Wheel of Misfortune: Don’t Be A Gambler

Last week a good friend sent me a list of penny stocks and asked for my opinion. He just went through a divorce and he’s looking for a fast track to get his finances back in order.

My response to him is consistent with how I respond to everyone looking for a shortcut to getting rich in the stock market. Regarding the companies he wanted me to look at, I told him:

“I always go back to the fundamentals on these companies. The companies you identified are incredibly volatile and consistently losing money. If I were you, I might devote some part of your portfolio to the riskier picks, but I would make the core of your portfolio ‘sure-fire’ picks for wealth-building.

As I always remind people, high-risk, high-reward can be nice, but people always seem to forget about the high-risk part. And then when their stock falls by 80%, they panic and sell.

So, yes, you may see some high-flying stocks generate incredible returns, but then people don’t know when to get out. It’s like the casinos. Every night there are people who have huge wins, but on average, over time the casinos win. So give me those sure and steady companies. They will make you rich.”

What are those “sure and steady companies?” They are companies, across all sectors, that generate cash and pay dividends. Those are my favorite types of companies, because the need to generate cash means they are more likely to be conservative with their spending decisions. Companies that are generating cash are less likely to go bankrupt.

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So give me companies such as Coca-Cola (NYSE: KO), Target (NYSE: TGT), and Verizon (NYSE: VZ) (all of which are actually in my own portfolio). We can collect dividends and sell covered calls on these stocks and steadily build wealth. They don’t offer the exciting ups and downs of some of the high-flying technology companies, or of Bitcoin (BTC). However, they 1) have businesses we can understand; 2) They will pay us for owning them; and 3) They aren’t going out of business.

That’s a recipe for getting rich with certainty. It just takes patience and consistency.

So I told my friend not to be a gambler. Be the casino. If you want to invest in penny stocks or other high-risk investments, devote only a small portion of your portfolio to such investments. Maybe you will get rich with those, but probably not. Instead, devote the bulk to the slow and steady. Those can make you rich with far greater certainty.

That’s why our investment team has put together a new special report on the best growth stocks to own for 2021. As the economic recovery strengthens, these steady companies should outpace the broader market this year and beyond. For your copy of our report, click here.