Stock Picking Won’t Make You a Billionaire

You are not going to become a billionaire by playing the stock market. It doesn't matter if you're really good and get really lucky. It doesn't even matter if you start out with a relatively sizable fortune. The stock market is good for a lot of things, and investing has a role to play in nearly everyone's financial future, but it's not a vehicle for making billionaires.

That's not to say that it's impossible to make it to billionaire status. Forbes identified 1,826 billionaires in its 29th annual Billionaire List, including a record 290 first-time members. The world's super-rich come from an enormous range of backgrounds, and plenty started with little or no money to speak of. The key insight, however, is that none of them made it there from a brokerage account.

Warren Buffett, chairman of Berkshire Hathaway and self-made billionaire, is one of the richest people on the planet. He's probably the best-known investor of all time. The Oracle of Omaha bought his first stock, six shares of Cities Service, when he was just 11 years old. He stuck with the markets his entire life, trained under the great Benjamin Graham, teamed up with Charlie Munger, and entered 2015 with a net worth greater than $62 billion. It's a fantastic story, but one that's easy to misinterpret, nearly impossible to emulate and requires much more than just portfolio management.

Most people get the Buffett story wrong. On the surface, the story's protagonist looks like a diligent, wise investor who studied business fundamentals, made good stock picks and rode a wave of above-average market returns to massive windfalls.

Buffett isn't the only example. Carl Icahn and George Soros each built billionaire stock portfolios since the 1960s, drawing legions of imitators in the process. Each one appeals to a different subset of investors: Icahn to contrarians, Buffett to fundamentalists and Soros to the psychology-based investor reflexivity advocates.

You can't follow in their investing footsteps to billionaire status because Buffett, Icahn, and Soros aren't just investors. They are also shrewd entrepreneurs and businessmen with a keen ability to meet shareholder and consumer demands at the right time.

Consider Buffett, whose genius lay in personally evaluating business operations and discovering undervalued opportunities. By the time he was 31, Buffett actively ran seven different partnerships. He personally met with Walt Disney in 1965 before investing $4 million in Disney's company. By 1970, when Buffett was 40, the millionaire dissolved his (now amalgamated) partnership and divested its assets. He became chairman and chief executive officer (CEO) of Berkshire Hathaway, actively flying all over the country to perform valuations and meet with fellow entrepreneurs.

Buffett didn't just study financial statements and submit trade orders. He created a brand, advised up-and-coming companies on their operations and set up an entire national business network. Berkshire Hathaway makes money in ways that no individual investor can. This is partially due to the company's incredible cash flow, which lets Buffett cut deals that aren't available to the general public (called "sweeteners" in the trade). It's also because Buffett has the time and clout to travel around the world to investigate firms first-hand.

Look down the Forbes list of the 400 wealthiest people, and you'll see that none of them made their fortune by making stock picks alone. None of them were employees their entire careers. All of them are either entrepreneurs or the financiers of entrepreneurs. Most own businesses or are partners in multi-billion dollar ventures.

The S&P 500 returned at an average annualized rate of 9.6% between 1928 and 2014. Even with a generous bump up to 10%, it would take an investor more than 24 years of compounding growth to become a billionaire – if they started out with $100 million in equities.

Most people (even some billionaires) don't have $100 million to invest in stocks. You're likely to need a lot more than 10% average annual growth to jump into the billionaire class.

Suppose you perform extremely well and save up $1 million worth of investable assets by age 30, which is no small feat. You then apply all $1 million to the markets and somehow realize the same incredible 17.7% annual return as Warren Buffett's company, Berkshire Hathaway. In the end, your portfolio would grow to approximately $300 million by age 65. It's a lot of money, but it's still $700 million short of billionaire status.

If you're a 35-year-old with just $6,000 to invest, you'll need to average about 40% returns until you're 70 to become a billionaire. Even if you build an awesome portfolio, that's not happening.

The numbers don't add up. Take a realistic, practical look at your stock market expectations. Otherwise, it's too easy to become disenchanted with performance and either stop too soon or get too aggressive.

In 2014, author and financial data guru Philip Fanara released a book titled "The Stock Market Outsider: Becoming a Billionaire." Fanara's book, which touts "knowledge that the average investor does not have," is just the latest publication in a long line of "get-rich-with-this-trick" tomes, and, like those that preceded it, it's just not reality. Two hundred pages of investor psychology or technical pattern recognition won't suddenly transform your brokerage account into a treasure trove.

Martin Fridson, author of "How to Be a Billionaire: Proven Strategies From the Titans of Wealth" hits the nail on the head. He points out, "If you beat stock indexes by 1% consistently for over 20 years, you're a massive superstar." The numbers have already shown that it's impossible to become a billionaire on this "massive superstar" level performance, at least without a massive head start.

Wall Street supplements wealth, and while the few real winners may find a few million on the exchanges, they're largely a tool to beat out inflation. Real fortunes – at least, at the billionaire level – are built by entrepreneurs who find ways to put products or services in front of hundreds of thousands, if not millions, of consumers.