Posted on December 02, 2011 by CJ Article Team

There is a tragic fact in modern life. Young people today aren’t generally taught about money other than how to spend it. That’s such a shame.

Here we are in the land of Capitalism and young people aren’t taught in detail what Capitalism is and why it is so powerful. Why is that? With just a little education, their lives could be changed dramatically for the better. Perhaps this article will be the start of that change.

While the older investor has more experience and more knowledge about investing, the young investor can produce vastly superior results. Is that hard to believe? Well, it will become obvious in just a minute when we discuss the power of compound interest .

But before we get to that point, here is another reason this article will seem peculiar to a lot of readers. This is January 2009 and the stock market has taken one of its worst hits in modern times. And, to make matters worse, we are in a recession that no one is sure how long it’s going to last.

If you’re like most people, you will think this couldn’t be a worse time to invest in the stock market. I assure you, if don’t intelligently, it is a great time for the young investor. It can lay the foundation for them to become financially independent. Now that’s something to be excited about.

As you will soon see, the young person today should not wait to invest until they are older no matter what condition the stock market is in because it can end up costing them a tremendous amount of money.

The World’s Most Successful Investor

It goes without saying that the particular stocks a young investor buys will make a major difference over time when it comes to results. So that is where we must begin our journey.

The world’s most successful investor is Warren Buffet. One of his rules for investing is to buy only stocks that you would keep for a lifetime. When you do this, the movement of stock prices in the short run will not bother you as much as it would a person who is a trader. Buying only stocks you are willing to keep for a lifetime is one of the most important things you can do if you want to become an intelligent investor. Even more so for the young investor.

Beginner investors think that the way to make money in the stock market is through trading. Wrong. That is a formula for investor suicide. Warren Buffett did not become the world’s most successful investor by trading. He is living proof that buying stocks you would keep for a lifetime is the way to go. Life leaves clues. Warren Buffett’s strategy is a major clue for investors.

Instead of buying stocks to trade, buy good stocks to keep. In the long run, in addition to paying less in taxes, you will get the advantage of stock dividends growing over time as well as the ability to put compound interest to work for you. We’ll talk more about compound interest in just a minute.

So Rule 1 for the young investor is:

Buy stock only in companies you are willing to hold for a lifetime.

Rule #1 explains why this moment in history is not a bad time to buy. In fact with the market down, the young investor will buy at lower prices than they would have only months ago. If you are going to buy stocks you’d keep for a lifetime, the lower the price the better.

Now let’s talk about the next step in buying stocks for young investors.

Rule 2:

Buy companies who are #1 or #2 in their industries.

Warren Buffet calls this strategy – buying stocks with a wide mote. Old time castles had motes around them that would make it difficult for invaders to cross at times of war. In regards to companies in the modern day this means the company has developed a business that would be very hard for competitors to re-create and compete against. Warren buys stock in companies like Coca Cola and Gillette. The young investor needs to use the same strategy.

Think about it. Since you want to buy companies you’d keep for a lifetime, they need to be able to survive a lifetime. A wide mote goes a long way towards insuring survivability.Now, onto the next rule for the young investor:

Rule 3:

Buy stocks that pay a dividend.

Over time you want your stocks paying you cash so you can buy more stock. In a minute we’ll talk about Dollar Cost Averaging. But to do Dollar Cost Averaging you need some cash to invest. You’ll need more than just the dividends, but the dividends will help.

Rule 4:

Apply Dollar Cost Averaging to your investing strategy.

Dollar Cost Averaging means you don’t buy stock in a company all at once. You buy it in bits and pieces over time. For the same amount of money, you will be able to buy more stock when the price is low and less stock when the price is high. The average price you pay will be lower over time which will mean greater profits.

By applying the above four rules, a young investor will be in a position to put the power of compound interest to work. This is the young investor’s edge over older investors. Through compound interest, their money makes them more money which makes them still more money and so on. Over time, it really adds up.

It’s not the amount you invest that matters, it’s the plan that matters.

When first starting out, the amount available to invest will probably be pretty small. That’s okay. It’s not the amount that matters most; it’s the plan that matters most. A young investor’s goal should be to become a disciplined investor.

Start the first investor fund no matter how small. Yes, the goal in the beginning is to just accumulate some money. After all, you have to have something to invest with. Every young investor starts here. But over time, it will really add up.

Most of the growth in an account which grows from compound interest will occur in the later years. That’s the way it is. At first, growth will be very small. Patience is required. But that patience will pay big dividends as the money compounds year after year.

The average investor doesn’t have a plan to increase the amount they have to invest. They go about investing haphazardly. Don’t be like the average investor. When money comes your way, whether through work, chores (for the young investor) or gifts, pay yourself first. That’s the key. Put some money away with which you can invest when you have accumulated enough.

Paying yourself first moves you from being an average investor to being a smart investor. An investor who keeps the big picture in mind, the end result.

What is the end result? That’s simple. The end game is to become financially independent. And you do that by putting into action a plan which makes it possible for your money to bring you in even more money. This is accomplished through the power of compound interest. That is what the intelligent investor does. He puts him money to work so he doesn’t have to.

When I read the book “The Intelligent Investor” by Benjamin Graham (Warren Buffet’s mentor), I took particular notice of one important idea. Benjamin Graham said to not go after spectacular results, instead to go after adequate results. Now that’s strange isn’t it? Adequate results instead of spectacular results. Why would he say that? Here’s the reason: if you go after spectacular results you will become a speculator and the idea is to become an intelligent investor.

No one can time the market. Don’t speculate. Invest for the long term. All you need is adequate results enhanced by compound interest. Do that and you will be one of the most successful investors there is.

What you want to do is look for real value. Buy great companies and don’t mess with the rest. When great companies go down in price because of some temporary setback, it becomes an opportunity to add to your holdings.

By being choosy about the companies you buy, you become a value investor, not a speculator. That’s what Warren Buffett is. He’s looks for great values, buys when other people are selling and in doing so, has become one of the richest men in the world.

A beginner investor becomes an intelligent investor by following the general principles outlined above. Here they are again:

Rule 1 for the young investor:

Buy stock only in companies you are willing to hold for a lifetime.

Rule 2:

Buy companies who are #1 or #2 in their industries.

Rule 3:

Buy stocks that pay a dividend.

Rule 4:

Apply Dollar Cost Averaging to your investing strategy.

By doing the above with discipline, the young investor will put compound interest to work for them and in the long run they will make a lot of money. They will become financially independent which is something we all wish for but which is something few achieve.

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