I often write on Quora.com, where I am the most viewed writer on financial matters, with over 608.1 million views in recent years.
In the answers below I focused on the following topics and issues:
- What are the most important rules to follow when investing?
- Why do rich people tend to have a neat appearance?
- Do you think luck is important for success?
- Is it fair to assume that the wealthy are more knowledgeable than the less affluent?
- What is equity risk premium?
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What are the most important rules to follow when investing?
The main ones are:
1. Diversify and play the long game if you want to preserve wealth.
In comparison, be concentrated if you want to grow wealth more quickly.
Simple example. Somebody who invests 60% in a diversified stock market, the S@P500 for instance, and 40% in bonds, is seldom down over 5–10 years:
However, bonds perform worse than stocks long-term as per the graph below, and you are very unlikely to lose in the stock market if you invest for decades
So, being focused on higher performing assets when you are young, and then being more diversified when older, can make sense.
Risk is not volatility.
2. Focus on inflation and returns
Following on from the last point, many people think that volatility is risk.
Therefore, having money in the bank isn’t risky as it isn’t going up or down.
Nothing could be further from the truth. You face currency and inflation risk.
If inflation is 5% per year and the bank is paying 2%, you are guaranteed to lose 3% to inflation.
That isn’t to mention the multiple banking crisis we have seen globally.
Likewise, with stocks, real estate and bonds, it also makes sense to factor in inflation.
3. Focus on time
How much is an hour of your time worth?
How much is less worry to you worth?
Automate the process of investing by setting up a direct debit, or use an advisor if time and hassle is important for you.
Why do rich people tend to have a neat appearance?
Many people have noticed the opposite.
Both observations are true.
The reality is, money removes the mask.
When you have more money, status and power, you can do what you want more often.
For instance, nobody will tell off the boss for dressing like a tramp, or for over-dressing, in the office.
So, people tend to show their real character and preferences once they have money.
This man liked to dress like a geek when he was a teenager and had nothing:
Therefore, just like other tech geeks, it shouldn’t be a surprise that he wears a suit even less these days.
This man makes Zuckerberg look over-dressed. He looks beyond scruffy.
He actually has a net worth of about $50m, despite claiming to be against the establishment.
Over a decade ago, the biggest young footballers were Ronaldo, Messi and Rooney (believe it or not).
Ronaldo is now even more flash than ever, with his own fashion line.
Rooney looks like this:
He has an estimated net worth of $170m.
Messi probably looks scruffier today than when he was in his teens and early 20s as well.
You can’t change people’s character.
Success and wealth merely makes people feel more comfortable about being themselves.
What is true, however, is that people who haven’t quite made it feel the need to dress up and show off.
You see it in the finance industry a lot.
People wearing flash suites, and having even flashier offices.
You don’t need to “dress to impress” if you have made it.
It merely becomes a choice.
Ditto in fancy restaurants and bars.
The people who are dressed up and ready to post on Instagram often have less than the person who isn’t taking any pictures, and dressed down.
Do you think luck is important for success?
Here is billionaire Mark Cuban admitting that if he was born five years sooner, or later, he might not have been so successful:
Randomness is a huge part of success.
With that being said, it isn’t the only parts of success of course.
Look at Cuban’s case.
Yahoo bought his company for 5 billion+.
He couldn’t sell his stocks too soon, so he purchased put options.
That decision saved him from the bloodbath that was Yahoo’s share price plunge in the early 2000s.
What is more, if he thought that luck was the most important aspect, he probably would never have started the business to begin with.
You sometimes make your own luck.
Is it fair to assume that the wealthy are more knowledgeable than the less affluent?
There are two ways of looking at this.
Firstly, if you were to just look at the whole human population (8 billion +), and do a broad mean or medium average, then the answer is more likely to be yes.
That is because the poorest 25%-30% of the world is still very poor, and access to knowledge is constrained.
Believe it or not, the internet still doesn’t exist everywhere!
What is more, where it does, some of those people can’t read and write English and other major languages, or can’t use translation software.
Whilst that is changing dramatically, it is still a reality.
Conversely, when it comes to developed countries, the situation is more unclear.
Knowledge, in isolation, won’t make you wealthy, in much the same way that ideas won’t. Execution of ideas and knowledge is the key.
I have known many highly knowledgable people who aren’t affluent.
The main reasons are:
- They haven’t prioritized being wealthy throughout their lives
- They have prioritized it but they can’t execute well.
- Or they get good at skills the market doesn’t want to pay for. There is only so much money that the market will pay for a translator, or some other jobs.
- They haven’t prioritized being financially and business literate. Having great general knowledge isn’t the same thing as knowing how to make, and retain, money.
- Temperament and personalty is also an aspect in growing wealth. Things like patience/delayed gratification, aren’t always linked to knowledge. Everybody knows they should play the long game, but not everybody does.
The last point isn’t even mentioning risk taking.
Many of the most successful people went all in.
There were many people as smart and knowledgeable as Zuckerberg.
They didn’t take as many risks.
Elon Musk success can partly be associated with extreme risks taking as per this Nassim Taleb tweet:
It is compound probability.
If 1,000 people who already have talent, knowledge and money all take extreme risks, 1–5 might make it big.
What is equity risk premium?
It is the higher expected return that people expect from investing in stocks compared to traditionally ‘safer’ assets like bonds.
I wouldn’t analyse this too much though.
If you do, you might miss out on returns.
I saw this on LinkedIn a few days ago:
The person was saying that bonds look like a superior investment to stocks right now because the equity risk premium is under 2%.
But when was it last 2%, in fact around 0%?
In 2010!
Markets were cheap then and in some cases, such as with the s@p500, have increased by over three times since then.
The equity risk premium was also less than 2% before the huge bull market run in 2020 and 2021.
The biggest issue with it is that it measures the ‘expected’ premium.
By definition, people tend to get more pessimistic when markets fall.
Therefore, even though markets were cheap in 2010 after the 2008 crash, people were feeling pessimistic.
Ditto 2020 after the Covid-19 lockdowns.
So, it is better just to have a long-term plan and stick to it, rather than following other investors who might be becoming more (or less) pessimistic.
¿Le duele la indecisión financiera?
Adam es un autor reconocido internacionalmente en temas financieros, con más de 830 millones de respuestas en Quora, un libro muy vendido en Amazon y colaborador de Forbes.
