As I've pointed out in the last few blogs, ideas and property are great investments and wealth creators, but they have historically left a void for investors. To fill that void, Western society created another financial vehicle – stock, or equity ownership.

When an investor purchases a share of stock, the individual takes on the position of owner. A piece of paper called a stock certificate is issued to represent ownership, but that piece of paper has no intrinsic value of its own, nor does it guarantee any future value. The issuer of the stock does not guarantee you any return, but they will transfer to an equal portion of the risk in exchange for a chance to secure an equal portion of the profit or loss the company may realize from its business operations.

Whatever money is left over after the company deducts its expenses from its revenues is the profit or loss that is then shared with the investor through dividends or appreciation in the value of the company’s stock. It is the expectation of future results that causes the original investor to increase or decrease the price he is willing to accept to exchange his share of company stock for cash from another investor. One important attribute of stock ownership is that it is the only investment that can be held in multiple formats (a retirement account for example) while retaining the single truly capitalist fundamental – ownership.

As I’ve pointed above, there are three different ways you can choose to invest your money. You will build more or less wealth, depending on your choices. One option is simply to spend that dollar, which we all know how to do. A second option is to do what “lenders” do (but should not do) – lending your dollars in the hopes that this will build wealth. Most people think they are building wealth when they are lending their money to a bank via a CD, when they buy bonds or insurance products. But nobody I know and nobody you know has ever built or maintained wealth by lending his or her money. Between taxes, inflation, and time this is a guaranteed loss.

After all, nobody builds wealth simply by lending their money. Only through the third option – ownership – can you truly build wealth. By “ownership” I mean purchasing stocks in solid companies that operate under good, principled management. When you act as an owner with your capital, you can choose to own pieces of American industry, real estate, or even your own business. The more dollars you place in ownership, the more wealth you will build. Ownership is the real key to building wealth in our society, and this has held true through the pages of history.

This does not mean that you should go out and snap up the latest hot stocks. You’re better off ‘investing’ in a weekend in Las Vegas. Your ultimate goal should be to diversify your ownership – which means building a balanced portfolio in terms of company size, sector, and geographic location.

Historical market data tell us that the next twenty years will more than likely resemble the last twenty years, which that means the highest total returns after taxes and inflation will come from owning a fully diversified portfolio of strong, solid companies.

Hiatory also shows that two to three times per decade investors can expect to lose money - and once in a while there may be a big dip - but the stock market is a bit like a yo-yo climbing a flight of stairs. The key is to focus on long-term results. The media - among other so-called advisors – has a tendency to shift investors’ focus to the near term, by reporting on hot trends or ‘panics’ that naturally have an effect on people’s emotions.

But emotions should never guide your financial decisions; instead common sense and intellect should rule.

Remember, we live in a democracy that has embraced, among other worthwhile things, democracy. But under the terms of accepting capitalism in a democracy, we are responsible for our own decisions.

So it’s best to make the right decisions – the more often the better. We’ll delve more deeply into that in the next few chapters.

The Ten Truths of Wealth Creation

• The key to wealth is through ownership, not financial products.
• The more money moves, the more wealth is created.
• Everything in life requires payment.
• The biggest cost to wealth creation is through interest lost, interest paid, or taxes.
• Average rates of return and total rates of return are meaningless financial planning tools.
• Not all debt is bad. When determining whether to pay cash or finance a purchase, remember that you should not finance anything beyond its useful life.
• The obstacles to building wealth are the approaches we take, the economic system we live in, and the market information available.
• There is no such thing as financial goals; financial results are achieved through personal and professional goals.
• The key to wealth is understanding your options and minimizing your future decisions.
• Index investing is a flawed measurement tool. Risk is not about losing money.