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The world is full of get-rich-quick schemes. Buying FTSE 100 shares is not one of them, as far as I am concerned. Still, it could be a path to riches albeit at a more leisurely speed.
The foundations of wealth creation
In theory at least, getting rich is not that complicated. Buying assets for less (ideally much less) now than they will be worth in future is one way to do it.
FTSE 100 shares are a form of asset. But the key point, as far as I am concerned, is that they represent a stake in a much bigger asset: a company like Shell or AstraZeneca.
So by putting money into such shares when they are attractively valued, piling up (or reinvesting) any gains along the way and holding for the long term, I think it is possible to create wealth.
That depends, of course, on adding some money in the first place. Owning the right shares can be one way to build wealth – but it takes at least some money to purchase them to start with.
Here’s what can set FTSE 100 shares apart
Shares in far smaller, less known and potentially flashier companies can often seem more interesting to at least some investors.
Many people dream of putting a few pounds in some unknown penny stock and striking it rich.
It is true that some small companies go on to make massive returns for early stage shareholders. But loads do not. They simply sell more and more shares to raise cash, burn that cash and go bankrupt.
A great business idea or product innovation is not necessarily the basis of a great investment for a small, private investor.
By contrast, FTSE 100 shares can seem boring and stodgy. Some are mature businesses in areas that seem to offer little or no future growth opportunities.
But they are big. In most (not all) cases, they have grown big by honing a successful business over decades. The market can lose sight of that and send a share crashing in price from time to time.
I think that offers an opportunity for an investor to build a diversified portfolio of great companies at attractive prices – and hopefully build wealth.
Want to know what I think a great company looks like?
As an example, JD Sports (LSE: JD) is worth considering. To start with, have a look at the share price chart over the past few years.
See how much the price has moved around? Even over the past year alone, the cheapest price has been less than half the most expensive one.
Has the actual value of JD Sports’ business seesawed as much as that in just 12 months? I do not think so (though I could be wrong).
Rather, I think investors have struggled to value the business. Its stream of profit warnings suggests consumer demand may be weakening and JD’s store opening programme risks eating into profits.
Still, the retailer does expect full-year profit before tax and adjusting items of £915m–£935m. Against that, its market capitalisation of £4.5bn looks cheap to me given JD’s strong brand, proven business model, resilient profits and growing international footprint.
