Source: Flickr user TaxCredits.net.
As a somewhat green-behind-the-ears investor in the late-1990s I recall being unable to avoid the plethora of "get rich quick" advertisements that I came across on a regular basis. From the late-night infomercials that promised to introduce you to a "system" that few other investors knew about for the low price of $59.95, to stock message board marauders who'd call a stock the next 10,000% winner, the idea of getting rich quick was alive and well.
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And, for a while, it actually worked.
The Nasdaq rose above the 5,000 mark in a relatively short time frame, investors with little to no experience could practically throw a dart at the newspaper and hit a winner, and even cab drivers were getting in on the action by handing out stock tips. It was one of the oddest times imaginable, and people were indeed getting rich quick. But it wasn't meant to last, and the dot-com bubble, followed by the Great Recession some six years later, burst many dreams.
Five wrong ways to get rich quickYet the pie-in-the-sky hope to get rich quick lives on. For a few people it'll become a reality, but statistics show that this isn't the case for most Americans, despite many Americans harboring the "get rich quick" sentiment. While I can't with any certainty tell you, the reader, what you should do to get rich, because everyone has their own unique path to attaining wealth, what I can say with some certainty is that there are five very wrong ways to get rich quick.
Source: Social Security Administration via Facebook.
1. Buying penny stocksPenny stocks get a lot of attention because of the common misconception that owning more shares of a low-priced stock gives you a better chance of doubling your money than had you owned fewer shares of a high-priced stock. According to this logic, 100 shares of a $1 stock give you a better chance of doubling your money than 1 share of a $100 stock does.
Aside from the fact that this concept is unfounded, penny stocks bring an entirely new set of problems to the table. Because few penny stocks actually trade on reputable stock exchanges such as the NYSE or Nasdaq, most aren't required to maintain strict reporting guidelines. What this means is that the penny stock you're eyeing may not have reported financials in weeks, months, or years! There may be little way of knowing. Sometimes even finding out what a company does can be a challenge!
If your goal is to go broke fast, penny stocks might be for you. Otherwise, over-the-counter stocks should be left alone.
Source: Flickr user Michelangelo Carrieri.
2. Chasing the "next big thing"Investors tend to jump the gun when it comes to picking the "next big thing." I remember when business-to-business (b2b) websites like the now-defunct Commerce One garnered a $30 billion valuation prior to the dot-com boom despite the fact that it hardly had a dime in revenue. Similarly, we've been hearing about near-field communications chips for more than half a decade, but only recently have we even started to see them being used in smartphones.
The point being, we're awful at predicting when a new technology, product, or service will become the next big thing -- and investors have lost a substantial amount of money chasing stocks involved in sectors of which they have little to no knowledge.
My suggestion would be to let the underlying financials in a sector do the talking instead of the hype surrounding the "next big thing."
Source: Flickr user Robert Couse-Baker.
3. Purchasing a lottery ticketThere are very few things in this world with odds as horrible as winning the lottery, yet the lottery continues to generate billions of dollars each year. The North American Association of State and Provincial Lotteries estimates that Americans spent $70.15 billion on lottery tickets in 2014. That's more than Americans spent on sports tickets, books, video games, movie box office tickets, and music sales... combined!
Just how bad are your odds of winning? You have a better chance of being killed by a vending machine (one in 112 million), getting attacked by a shark (one in 11.5 million), or having identical quadruplets (one in 15 million), than you have of winning the lottery (one in 176 million).
Your chances are so infinitesimally small that you might as well put your lottery ticket dollars to better use.
Source: Flickr user Sara Hughes.
4. Putting all your eggs in one basketAnother easy trap to fall into is making an all-or-nothing style stock market bet by putting all of your money into a single stock. Being right could put you on the path to instant wealth, but you'd probably need to be right a dozen times in a row to really be classified as "rich," because, let's face it, not every stock you buy is going up 100% in a week! The chances of being right 12 times in a row or more, even for the world's best investors, are pretty slim.
Diversifying your money at least over a couple of stocks is generally going to give you a much better shot of success when investing in stocks.
Source: The Cosmopolitan of Las Vegas via Flickr.
5. Heading to the casino Finally, betting on black could have you seeing a lot of red. While we do hear stories about summer trips to Vegas netting someone a big payday, it's rare that people can actually make a career out of professional gambling.
Casinos are designed to do one thing: take your money. There isn't a game you can play inside the casino where the odds are in your favor. There are certainly by-the-book strategies you can use as well as table games you can play to minimize the odds of the house, but make no mistake about it, the cards are stacked against you.
The get rich quick lesson you need to learnIf there's one takeaway from all of these methods, it's that there really is no successful way to get rich quick. Although some people get rich from dumb luck -- from winning the lotto or hitting it big in Vegas, for instance -- there is no rhyme or reason, or formula, to make this happen.
For you, the investor, it means sticking to the tried-and-true method of getting rich: buying quality stocks and sticking with them over the long run. I know that may not sound as fun as hitting the jackpot in Caesars Palace, but an 8% historical return from the stock market over the long run isn't shabby at all. Plus, if you find quality dividend stocks you can reinvest the payouts into even more shares and create a revolving door that continues to compound your wealth over time.
"Get rich quick" might be a bit of a pipe dream, but becoming rich by the time you reach retirement is very much an attainable goal for many Americans.
The article 5 Wrong Ways to Get Rich Quick originally appeared on Fool.com.
Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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