Sunday, May 6, 2018

Path towards Wealth

One of the best biographies about Warren Buffett I have read is the Snowball by Alice Schroeder (available on Amazon). Basically, it tells how Warren, the newspaper delivery boy, snowballed into one of the most successful investors and richest men on this planet.  Richer and more powerful than the Pharaohs of Egypt who at the time were considered to be gods.  It is basically a story of compound interest. Not in the traditionally way of putting money in a GIC and wake up 60 years later.  That in many ways is a delusion.

There are those who use their first pay cheque on a lease of a beautiful BMW which will turn to rust and is worthless within a few years.  It is the ultimate form of senseless consumption.  These are the people of instant gratification and who cannot wait until they truly can afford a BMW.  I always love the old Paul Mason Wine commercial: “We don’t drink the wine before its time”.  So true! On the other extreme, are the misers who save every penny during their entire adult life, but by the time that they can afford that BMW they can’t bring themselves to spend the money.  They will never enjoy the fruits of their frugality.

It is important, especially in those early days of your money earning life not to squander your wealth because this is the foundation of your future, just like your education (which may take many unique forms).  It is not that a good start is essential for a big win – but just like in a race, the start is very important. This early money will lay the foundation of building the self-discipline needed to allocate resources. It will pay for your lessons of life; your investment mistakes are not just expensive, but they also are often necessary and painful lessons, that teach you what investment is really about. I guess, that way, you could see that BMW also as an investment lesson; but many people that fall for that kind of lesson seem to never learn.

Investing is not about the dollars in your bank account, although ‘Net Worth’ is an important score-keeping card to track where you are going. Every so-many years or so, sit down and say, what was my net worth 5 years ago and how much is it now?  Then calculate the difference and estimate how long it took you (or will take you) to double that initial net worth. 72/number of years to double – that is your after-tax rate of return. If you are making 5% plus inflation, then you are doing great. Nobody gets rich over night, although there are periods of stagnation and then there are the rapids in life.  But your wealth will snowball at the rate of return you make on your net worth similar to the compound interest calculation.  Do NOT compare your returns with a stock market index. Those are not real!   I like to double my net worth every seven years, but a lot depends on the rate of inflation and whether the country I live in takes too much of my winnings.  Any government that stands in the way of its citizens to become successful by their own means is malignant. It is a government that disempowers its people in realizing their personal goals.  It truly is an abomination and that is why I hate the current Canadian liberals with a vengeance.  But people get the government they deserve not the one they vote for.  Who ever believes the promises of a politician?

BTW, did you hear me talk about investing in stocks up to now?  No because what you invest in can take many forms and it does not always reflect in your net worth. I sometimes see very little difference between renting and owning your own residence. But, contrary to many financial pundits, I do consider it part of your investment strategy and a personnel residence is definitely an investment whose performance, like anything else, depends on how you manage it.  The difference between renting or owning is NOT about qualifying for the mortgage.  After all, the rent includes the mortgage payments for the landlord – the tenant basically pays the mortgage.  The real difference is about having a down payment and the risk of losing it.

As to your career, it is part of your investments and it throws of significant cashflow. But like a bond, your career can expire – you also can renew it and, in my book,  there is no age limit.  Life is too short to do things you hate. So, when choosing a career, it is a learning experience whether you find your cup-of-tea right away or much later in life does not matter.  I always follow the rule that when you do what you are passionate about, money will follow.  How many musicians have become multi-millionaires? How many English Lit majors became famous authors or, for that matter, stock brokers.  But choose your career also, as part of the goal that you set in life.  Often doing what you like and reaching your dream in life requires a similar travel route.

But, the big BUT is that you must know how to manage your assets in life and you must learn how to use these assets to provide you the cashflow you need without depending on your career.  If you can do what you want in life without depending on your job that is the time you truly are a ‘financial adult’. Nobody will be there to tell you how you live your life! That should be your real goal and then you can more and more pursue whatever you feel is worthwhile doing.  This is important from the start but becomes infinitely more important later in your financial adult life.  See it this way, when you grow up you first obey your parents and somewhat later you also obey your teachers. Next you find mentors who guide you by example or directly through instruction.  A good employer is also your mentor – never forget. If your employment does not make you grow as a person then dump it. Finally, you are financially independent or, as I call it ‘grown-up’. That is when you only have advisors.  After all, you never stop learning and advisors may play a key role in that. But you are in total command and you make the decisions.

Your net-worth, includes personal growth, and over time it all will snowball and by the time you become a centennial you probably have wealth beyond your wildest dreams.

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