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Maybe it's just movies, get-rich-quick advertisements, or the very uncommon case that gives this impression, but it seems people think it's possible to multiply your money dozens or hundreds of times in the market and become a millionaire in just a few years. Thinking logically this shouldn't be possible. Even the best performing companies seem grow by maybe 10x or so before becoming stable, and even that can take a decade. Starting with $10k, you would have to invest in exactly the right stock(s), wait a decade to grow it, then sell and start over again, and wait another decade.

By what multiple can money grow with just wise investments? And how long does it take? For example, Warren Buffet had to have made his fortune doing more than just buying and selling, right? There's no way that alone could turn $10k in 1950 into $50B today... could it?

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Yes, it's possible. However, it's not likely, at least not for most people.

Earning a million is not that difficult, but when you talk about billions that's an entirely different story.

I think the key point that you're missing is leverage. It's common knowledge that Warren Buffett likes to have a huge cash warchest at his disposal and does not soak himself in debt. However, in his early years Buffett did not get to where he's at by investing only his own money. He ran what was basically a hedge fund and leveraged other peoples' money in the market. This magnified his returns quite substantially.

If you look at Buffett's investments, you'll notice that he had a handful of HUGE wins in his portfolio and many more just mediocre success stories. Not everything he invested in turned to gold, but his portfolio was rocketed by the large wins that continued to compound over many years because he held them for so long.

Also, consider the fact that Buffett's wealth is largely measured in Berkshire stock. This stock is a reflection of anticipated future earnings by the company.

There's no way that alone could turn $10k in 1950 into $50B today... could it?

Why not? Take the two founders of Google for example, they became billionaires in short order when Google had it's IPO and basically started in a garage with very little cash. Of course, they didn't do this by buying and selling shares. There are many paths to earnings enormous sums of money like the people you're talking about, but one characteristic that the richest people in society seem to have in common is that they all own their own companies.

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    You forgot to mention a very important fact - for every investor who makes himself rich with leverage, there are literally thousands that make themselves extremely poor. – DJClayworth May 2 '11 at 17:21
  • @TheMatt, If a hedge fund earns 10%, the earnings go to the investors (clients) and not the owner right? In that case, how does a hedge fund owner earn anything at all? – Pacerier Nov 9 '13 at 16:46
  • @Pacerier The hedge fund owner gains the fees that they collect from the investors. n.b. The owner also gains those fees in the case that the fund loses 10%. Also, the owner could be invested in the fund. – Brian Jun 26 '18 at 21:50
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To get rich in a short time, it's more likely what you want to do is go into business. You could go into a non-investment business such as opening a restaurant or starting a tech company, of course.

Warren Buffett was working in investing, which is quite a bit different than just buying stocks:

  • he had a professional education and lots of experience in investing
  • he was managing other people's money, giving him more to work with
  • he was also collecting fee income
  • he had access to private market opportunities and special deals individuals would not get
  • he was working full-time on the investing
  • he could be an activist (take control of companies or make them do things)
  • the market was less efficient, and probably also less overvalued than now, over the bulk of Buffett's career
  • Buffett is the very most successful guy out of however many thousands have tried

The three ways to get rich investing I can think of are:

  • make it a full-time job and get a real education and real mentoring. But then you aren't really getting rich quick on the side, you're just choosing a lucrative career and doing well in it, right? If you don't think you could do well in that career, don't think you'll do well spare-time investing...
  • save enough money regularly over your lifetime. lots of frugal people who never made a ton of money do retire rich, just by never doing anything silly and always saving 10-20% of their income over 30-40 years.
  • buy the investment equivalent of a lottery ticket and get lucky. it's probably simpler and better to just buy an actual lottery ticket than to find the right penny stock or biotech thing or crazy out-of-the-money option.

I think the maximum real (after-inflation) return you can really count on over a lot of years is in the 5-6% range at most, maybe less. Here's a post where David Merkel argues 3-4% (assuming cash interest is close to zero real return): http://alephblog.com/2009/07/15/the-equity-premium-is-no-longer-a-puzzle/ At that rate you can double every 10-15 years.

Any higher rate is probably risking much lower returns. I often post this argument against that on investment questions: http://blog.ometer.com/2010/11/10/take-risks-in-life-for-savings-choose-a-balanced-fund/

Agree with you that lots of people seem to think they can make up for not saving money by picking a winning investment. Lots of people also use the lottery as a retirement strategy. I'm not sure this is totally irrational, if for some reason someone just can't save. But I'm sure it will fail for almost all the people who try it.

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10 year US Treasury bonds are currently yielding 3.46%. If you're offered an investment that looks better than that, you should ask yourself why big investors are putting their money in US Treasuries instead of what you've been offered. And obviously at 3.46% per year, you're not going to get rich quick -- it will take you over twenty years to double your money, and that's without allowing for inflation.

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You are probably right that using a traditional buy and hold strategy on common equities or funds is very unlikely to generate the types of returns that would make you a millionaire in short order.

However, that doesn't mean it isn't possible. You just have to accept a more risk to become eligible for such incredible returns that you'd need to do that. And by more risk I mean a LOT more risk, which is more likely to put you in the poorhouse than a mansion. Mostly we are talking about highly speculative investments like commodities and real estate.

However, if you are looking for potential to make (or more likely lose) huge amounts of money in the stock market without a very large cache of cash. Options give you much more leverage than just buying a stock outright. That is, by buying option contracts you can get a much larger return on a small movement in the stock price compared to what you would get for the same investment if you bought the stock directly.

Of course, you take on additional risk. A normal long position on a stock is very unlikely to cause you to lose your entire investment, whereas if the stock doesn't move far enough and in the right direction, you will lose your entire investment in option contracts.

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Short answer: Not likely.

Long answer: As a rule of thumb, over the long run if you are generating 20% compounded returns on your money consistently, you are doing very good.

Since in the average case your 10k would compound to $61.4k YoY, you are very unlikely to be rich in a decade starting with 10k.

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protected by John Bensin Aug 7 '13 at 17:42

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