“Rich” is different than “Wealthy” and time is key to success

Mickey Kim / October 23, 2020

In nine-plus years writing this column, I’ve been fortunate to become familiar with the writing of a small number of investment professionals who are “in the trenches” every day and are able to convey concepts/lessons in a common-sense manner everyone can relate to.

Morgan Housel is a partner at Collaborative Fund.  His new book, The Psychology of Money—Timeless Lessons on Wealth, Greed and Happiness, contains many of the same investing/personal finance lessons I’ve tried to convey, only better.  Jason Zweig at The Wall Street Journal said Housel “writes beautifully and wisely about a central truth: Money isn’t primarily a store of value.  Money is a conduit of emotion and ego, carrying hopes and fears, dreams and heartbreak, confidence and surprise, envy and regret.”

In other words, financial success is not a hard science like physics (with rules and laws), but a soft science like psychology (with emotions and nuance), so this book could be the best $18.99 you spend in 2020!

The book’s premise is how you behave with your money is significantly more important than how smart you are.  According to Housel, “A genius who loses control of their emotions can be a financial disaster.  The opposite is also true.  Ordinary folks with no financial education can be wealthy if they have a handful of behavioral skills that have nothing to do with formal measures of intelligence.”

Time in the market is critical, timing the market is not.

Warren Buffett’s investment acumen is legendary, but the “Oracle of Omaha’s” fortune “isn’t due to just being a good investor, but being a good investor since he was literally a child.”  Buffet is 90 years old and his net worth is $84.5 billion.  According to Housel, $84.2 billion of that was accumulated after his 50th birthday and $81.5 billion came after he qualified for Social Security, in his mid-60s.

According to Housel, if Buffett earned his same extraordinary average annual return of 22%, but had instead behaved like many  folks and 1) didn’t start investing until age 30, with say $30,000 and 2) quit investing and retired at 60 to play golf, then 3) he would have ended up with $11.9 million, still a sizable sum, but 99.9% less than his net worth today.

In other words, you would never have heard of Warren Buffett.

Buffett’s “secret sauce” was time in the market (three quarters of a century) combined with the “miracle of compound interest,” the most powerful lever for creating wealth in history. 

For simplicity, assume you Year 1 with $100 and earn 8% each year.  After Year 1, you have $108.  In Year 2 you earn 8% on the original $100 plus 8% on the $8 earned in Year 1 (i.e. interest-on-interest), ending with $117.  And so on.

In fact, the “Rule of 72” says dividing 72 by the assumed return gives you the number of years it takes for your investment to double.  Assuming an 8% return, your investment doubles every 9 years (72/8), so you have $200 after Year 9 and $400 after Year 18.

Housel says, “good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated.  It’s about earning pretty good returns that you can stick with and which can be repeated for the longest period of time.  That’s when compounding runs wild.

Indeed, the real “fireworks” didn’t occur for Buffett until well after most folks have retired.

Everything has a price, but not all prices appear on labels

Housel wrote, “like everything else worthwhile, successful investing demands a price.  But its currency is not dollars and cents.  It’s volatility, fear, doubt, uncertainty and regret—all of which are easy to overlook until you’re dealing with them in real time.”

So, you have three options.  First, “you can pay this price, accepting volatility and upheaval.”  Second, “you can find an asset with less uncertainty and a lower payoff (like bonds).”  Third, “you can try to get the return (on stocks) while avoiding the volatility that comes along with it.”

Many investors “form tricks and strategies to get the return without paying the price.  They trade in and out.  They attempt to sell before the next recession and buy before the next boom.” Unfortunately, trying to avoid paying the price is the most expensive mistake you can make.   

Housel recommends thinking of volatility as a fee rather than a fine in order to develop a mindset that “lets you stick around long enough for investing gains to work in your favor.”  Volatility (sometimes extreme) is simply part of the bargain of investing in stocks.  Think back to when the market was crashing in late March to its swift recovery. 

 As Napoleon said, “a genius is the man who can do the average thing when everyone else around him is losing his mind.”

Wealth is what you don’t see.

Housel believes “spending money to show people how much money you have is the fastest way to have less money.  The only way to be wealthy is to not spend the money that you do have.  It’s not just the only way to accumulate wealth; it’s the very definition of wealth.”

 We rely on visual cues, but outward appearances are often deceiving.

Rich is current income and easily seen in someone’s car or house, either live or in their Instagram fairy tale.

By contrast, “wealth is hidden.  It’s income not spent.  Its value lies in offering you options, flexibility and growth to one day purchase more stuff than you could right now.”

Housel defines savings as the gap between your ego and your income.  “One of the most powerful ways to increase your savings (and wealth) isn’t to raise your income.  It’s to raise your humility.”

My friend “Pete the Planner” Dunn refers to the practice of expanding your lifestyle as your income grows as “lifestyle creep.”  Your desire for more stuff is never satisfied and you’re always on the positional treadmill, chasing goal posts that are constantly moving.

As Greek philosopher Epictetus said, “wealth consists not in having great possessions, but in having few wants.”

The opinions expressed in these articles are those of the author as of the date the article was published. These opinions have not been updated or supplemented and may not reflect the author’s views today. The information provided in these articles does not provide information reasonably sufficient upon which to base an investment decision and should not be considered a recommendation to purchase or sell any particular stock or other investment.


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