This article will look at some of my Quora answers for this week. If you want me to answer a specific question on Quora, or indeed on my website, you can email me – firstname.lastname@example.org
Some of the best investors have average IQ. Charlie Munger makes an excellent point here:
Intelligence isn’t as important as emotional control in investing. What use is cognitive intelligence if you panic during moments like 2008 or March 2020?
Beyond that, I have noticed a commonality. People who know a lot about finance, including PHDs in portfolio theory, are more likely to get into trouble unless they know their limitations.
Few people remember the story now. In the late 1990s, long term capital management (LTCM) almost caused a financial crisis.
It was a hedge fund which was run by “genius” such as two noble prize winners, PHDs in finance and other well regarded people.
Early on, the results were excellent. During a time when the S&P500 and Dow Jones were going through a bull market in the 1990s, they were getting 40% per year!
More money poured in. Then to cut a long story short, this hedge fund needed to be bailed out by the Fed, as many banks were exposed to toxic instruments.
There was a worry about contagion so the fund was rescued. Most investors got out though so the fund never recovered.
What does that show us? Well:
- Short-term over performance doesn’t mean that much
- Regulation can cause more problems than it solves. Would they have taken as many risks if they hadn’t gotten too big.
- Being big isn’t always a good thing. They were better run when they were small
- The consumer is reassured by the wrong things. Granted, some of LTCM’s clients were institutional. However, many consumers still are reassured by things like academic qualifications and regulations
- A more vanilla strategy of holding the indexes would have been safer. Those kinds of funds can’t just go to 0 as they are merely tracking the S&P500 or other indexes.
- Complexity can be your enemy and simplicity your friend in investing. At least if you are long-term.
I have noticed that some of the most knowledgeable people I know about finance often get poor returns.
I the two biggest reasons are ego and lack of emotional control, which includes getting carried away by short-term over-performance.
So the “average” intelligence of an investor can sometimes be high, but averagely intelligent investors can outperform!
Even Buffett and Munger admit that some of the people they hire are smarter than they are.
That doesn’t mean they are better investors though.
The biggest ones have been any businesses relying on big crowds of people, or have been restricted by government shutdowns.
Examples of this includes:
- Airports, train companies, aviation in general including the airlines
- Sports clubs due to scenes like this – empty stadiums!
5. Bars, nightclubs and restaurants
6. Import and export has also been affected quite a bit as there were restrictions on certain types of flying
7. Any business that can be better done online. So any kind of online business sector (online teaching/education, online lawyers, advisors and so on) has been growing relative to those reliant on the old-fashioned face-to-face method.
8. People giving lectures and talks for a living unless they pivoted to webinars.
Anything reliant on face-to-face and big crowds has suffered compared to the old world.
What has made it worse for those industries, except inbound tourism which was growing rapidly before 2020, is that they were already losing market share.
The high street has been struggling for years, and losing market share.
Lockdown has merely pressed the fast forward button on this trend to digital.
So with the exception of tourism which I do think will recover and hit record numbers, most of the affected industries may never fully recovery relative to competitors that have stolen a march during this time.
It depends what you mean by the rules. If you mean the law, it doesn’t make sense to deliberately break it to get rich.
Even if we ignore the ethics of doing so, it doesn’t make rational sense.
It increases the chances of you getting found out later on, and suffering the consequences.
However, wealthier people are more likely to challenge conversational ways of doing things, rules and norms.
Most people are reassured by whatever is normal in their industry, society, business etc. If they weren’t, the fashion industry and trends wouldn’t exist.
Normal actions and behaviours, however, usually leads to normal results.
Bending or even better completely breaking norms, is more likely to result in better returns in business.
I will give you a simple example. Now almost “everybody” uses LinkedIn to network.
So it has became normal to use LinkedIn to find clients in many industries.
So few people are upset by spam messages on Linkedin now, but more people are doing it.
In comparison, 10 years ago Linkedin was more like a job/cv portal, and apart from recruiters few people used it for business.
Therefore, those that broke that “social convention/norm” got more traction, because fewer people were doing it, but they also got more angry messages like “LinkedIn shouldn’t be used in this way!”.
The word got around many industries that LinkedIn could be a good way to get clients, and isn’t just a CV/portal for jobs. So more people started to use it that way.
But now as it is normal and accepted, most people just ignore messages. That is just one example of hundreds I could give.
So it is important to differentiate between legal rules, legal norms and “societal or business norms and rules”.
Same thing in investing. Many people just invest in “what everybody else invests in”.
So if their parents and friends put money in the bank, they do the same thing. That is seldom a good strategy.
That doesn’t mean you should automatically do the opposite of what is normal, but just be sceptical about norms and don’t automatically follow them.
It depends on several factors. If you are a professional real estate investor, meaning it is your day job, then it is probably safer to invest directly in real estate.
That is assuming you have a portfolio of projects and aren’t relying on just 1–2 properties.
Likewise, if you are using property as a home and not an investment, then of course going the direct route makes sense.
For non-professional real estate investors, which is the vast majority of people including me (knowing about markets and real estate isn’t the same thing) REITS are much safer.
That is assuming it is a diversified, international, REITS which tracks the world market similar to the way index funds do.
The reasons are:
- The costs are lower, often 0.1%.
- Usually you can buy it free from taxes as well. The lack of taxes, buying costs, maintenance costs all add up. If you take the UK as an example, the average person pays around 5% buying cost (stamp duty) for a home + capital gains taxes on property are high. With REITS, they can be held in tax and cost efficient structures.
- No effort is required, so there are no time costs
- It is liquid so it can be sold at any time
- You still get the benefit of investing in real estate (the cashflow through a dividend and ability to get capital growth) but you just can’t get the same leverage. In other words, you can’t get somebody else to pay for your mortgage or investment unless you borrow money to buy the REIT and try to pay it off, which doesn’t make sense.
- You don’t need to rely on 1 or even 10 properties, or 1 or 2 markets. You can track the world property markets.
- You can invest in commercial and residential property without focusing on just one
- They can be held on the same investment account as bonds and stocks. As REITS tend to outperform stocks during some periods, and the stock indexes do better during other times, you can rebalance and use diversification as your tool to lower risks.
Even if you go down the direct real estate route, one of the few ways to reduce risks as much as REITS is to buy countless properties globally, so you aren’t relying on just one market or one property.
Few people have the skills or finances to do that, so REITS makes it easy.
Nobody knows for sure if QE will result in more asset price inflation, but little consumer price inflation, like what happened after 2008.
I would make a few points though:
- Nobody knows. Nobody can predict the future. Look at 2008–2009. All those people predicting big consumer price inflation and rising gold prices. What happened? Gold fell in 2008–2009, recovered to hit record highs in 2011, and then fell for years before more recently. Many people haven’t learned from 2008–2009.
- The “rich” aren’t a monolithic group. Some own more cash than they should as an example, but it is true that wealthier people are more likely to own assets like stocks and property
- With interest rates at 0% for longer + QE a lot of people will think “where else can I put my money”. That will help the markets and some other assets.
- If there is higher consumer price inflation, that could help some poorer people, because debts get deflated.
- What is much more likely to cause consumer price, as opposed to asset price inflation, is the localisation of supply chains.
- Long-term, regardless of what happens to asset prices in the short-term, they go up more quickly than wages. That was the central idea behind the book below:
7. Therefore, regardless of what happens short-term, long-term owners of assets will get richer than those that have none, unless governments bring out huge wealth taxes or the owners of assets panic during any type of market crash.
8. The bigger thing that tends to affect wealthy families long-term is complacency. There is a Chinese expression that wealth doesn’t usually last three generations. One of the biggest reasons for this is complacency. Wars or inflation in isolation don’t kill wealth – complacency does. For example, sensible businesses people diversified away from Latin America after Chavez came to power whereas others kept all their eggs in one basket, and therefore were affected by the inflation and new policies.
So even though nobody knows what the future may hold, keeping money in cash has never been a winning long-term strategy.
Wealthier people are more likely to put money to work.
I presume this question is being asked from a financial perspective, as opposed to education advice.
If it from a financial perspective alone, then the easiest way is just to get started asap.
If you invest over a period of 16, 18 or 20 years, you have a much better chance of paying for college or university fees due to compounding.
The problem is, education inflation in the US, India and beyond is much higher than general inflation:
This chart shows the situation over a long period of time:
So it is best to:
- Start early
- Start with an aggressive asset allocation which is aligned to stocks more than bonds
- Overestimate how much you will need as opposed to underestimating
- Never panic if markets are down and your accounts are suffering for a few years
- Make sure you are investing in a tax-efficient structure such as Junior ISAs if you are living in the UK. Most governments have similar schemes.
On another point, the world is changing at a quick pace. These days people need a combination of formal and self-education.
So some of the kids that are best prepared for modern life aren’t just focusing on conventional education.
A lot of research has came out which has shown how activities like learning languages, instruments and reading can be more vital to kid’s development than merely focusing on academic abilities.
And let’s not forget that teaching kids early on about financial literacy, if done in a fun way, is one of the best gifts you can give to them long-term.
Before answering the question head on, I would make just one quick point.
Very few people, even very wealthy people, are motivated to have money in savings accounts paying 0%-2% per year, which is often below inflation.
You are right that rationally people should have at least some emergency money in a bank account, but for most spending and/or investing money is more attractive than merely saving it.
I actually know several people with huge investment portfolios who barley have anything in any savings or cash accounts.
Maybe it isn’t recommended but it does prove an important point.
I think your point is a wider one though, and is a really good question.
Why do people who claim to be broke, and often say they don’t have enough money to invest, save, go on holiday etc, often overspend on phones and many other items including cars?
The main reasons are often:
- Peer pressure. If other young people are doing it, many people will follow
- Demand from marketing. Firms spend a lot on marketing to persuade you to buy products
- Status. In the early days of smart phones when very few people had them, some people saw that as a status symbol to show that they might be rich. Clearly that has changed now though but was more common when $1,000 iPhones first came out.
- Price marketing. Studies have shown that if we pay a higher price for things our brains assume that the quality is better. Some simple examples. Researchers have often taken two people to the same restaurant, with identical menus. Group A was charged much more than Group B. So Group B got the better deal. Guess what though? Group A claimed they were happier with the experience! Likewise, try this trick on somebody you know. Have a blind wine test, or maybe try with an item like a cake. Tell them one cost $10 and another cost $60. Don’t tell them they are the same until the end. I will guarantee you that most people will swear that the $60 one tastes better, unless your body language gives away the trick. Many studies have shown that price can even subconsciously alter our tastes buds, as it releases feel good hormones, if we are told the price beforehand.
- Familiarity. If you get used to using a certain phone brand, you are unlikely to change.
- In certain limited situations, it can make sense. If you buy a $1,000 iPhone and keep it for 7 years, and it is your phone, internet connection and essentially laptop, it isn’t that expensive. It could be cheaper than a cheap phone + a cheap laptop. This certainly doesn’t apply to somebody that keeps upgrading though.
- If you buy on contract in many countries, it seems cheap if you are only spending $50, pounds or Euros a month. People don’t process the price as much. This is another example of price marketing. So this avenue allows even people who are struggling badly to own a top end phone.
- Loss aversion. Nobody misses what they didn’t have before. When the iPhones came out, few had them. We were used to phones like the one below. However, once we get used to more conveniences, we feel like we are losing out on something if we downscale.
Nevertheless I think people don’t overspend as much on phones as they do on some other items.
Smoking, excessive alcohol, cars and buying the most housing which is possibly affordable, therefore leaving little deposable income, is a much bigger issue for some people on limited incomes.