In the answers shared today I focused on:
- What is the biggest reason wealthy or rich people don’t stay rich forever? I tell the story of a former acquittance who went from doing very well to broke. How can people avoid this fate?
- How can people avoid consumer debts?
- How can people buy Tesla’s stock from South Africa or beyond?
- Does it really make sense to short stocks? I explain why it doesn’t usually make sense.
- Is it time to move out of big cities like London now more people can work remotely?
If you want me to answer any questions on Quora or YouTube, or you are looking to invest, don’t hesitate to contact me or use the WhatsApp function below.
Why don’t rich people stay rich forever? What causes their downfall?
Below is a picture of Shanghai in 1987 vs 2013:
I know a man who made a lot of money in the market.
He, partially at least, caught two big trends:
- The rise of the real estate market in China. That was ongoing but picked up speed after the 2008–2009 resulted in stimulus which pushed up prices higher.
- The rise in Chinese buyers of foreign real estate after the local Chinese market became over-valued.
In addition to that, he was only really selling property, so he avoided the debt/leverage issue which can wipe out many property developers and investors.
The last time I spoke to a mutual acquittance, it appears he has found hard times.
So hard that he was asking people to lend him money and needed to move to another city to reduce his living costs.
It is hard to know the exact reasons for this downfall.
It seems like a combination of the following reasons has resulted in this situation
- He was complacent. He didn’t factor in risks like if getting money out of China would become more difficult. Furthermore, he also didn’t diversify beyond his main market (China) quickly enough to reduce risks.
- He overspent and invested close to 100% of what was left into his own business. So, he didn’t have a lot of private wealth, if any, to fall back on.
- He didn’t adapt to changing consumer tastes.
- An unexpected event, Covid, appears to have put the final nail in his business coffin, at least for now. This is partially related to the third point though. If he had gone online sooner when the consumer changed their taste, he could have benefited from lockdown. Instead, he was reliant on face-to-face meetings.
- Drinking a lot didn’t help him when things were getting worse. The last time I met him, I happened to stumble upon him in an expat bar which is frequented by expats, when I was visiting. It is clear now why he was acting strange on that night!
- He didn’t manage the businesses cashflow well.
- He earned too much, too quickly. He peaked too soon and too young. This resulted in complacency and arrogance.
- Often there is a reversion to the mean. You see it in sports. How many players stay at the top (meaning the very best in the world) for 15 years? Very few. Most fade. The few that don’t are respected everywhere. Same in music. The same is true in business. Loads of people succeed for a short-time. Few do it long-term. Even fewer are self-aware enough to know that their success was partially down to timing and being conservative with money makes sense.
This is just one example from my network, but it is quite typical. Complacency, not managing risk through business and personal wealth diversification, not adapting, unexpected events and not fixing the roof when the sun is shining all contribute.
You see it every time there is an unexpected political event. Loads of people with businesses in Tunisia and Egypt suffered after 2011.
The same thing in Venezuela, and Covid. The biggest reduction ever has come during world wars. Often people don’t plan for the worst case.
Final reasons are divorce and second and third generation rich who waste the money.
People who only know how to spend and not manage money are sometimes doomed to fail.
This doesn’t apply to everybody though. There are plenty of wealthy people who don’t fall into these traps.
How do I avoid ever getting into debt?
Before answering this question, it has to be remembered that not all debts are equal.
As an example, comparing student loans to mortgages and commercial debts isn’t a fair comparison.
I will presume you are more speaking about commercial debts than business loans or student debts.
Anyway, the main ways you can avoid such debts are:
- Spend time with people who are better with money. Marrying the wrong partner, or having toxic friends, increases the odds of debts.
- Write down your spending, make a budget and try to keep to it. Some of the easiest ways of keeping to it are simple, like using cash more than cards. We subconsciously spend less this way.
- Live below your means. If you live below your means during the good times, you will have money in the bad times.
- Stay healthy for as long as possible. Some people go into a debt spiral after a health accident, often because they have lost their job. This one is partially out of our control though, but we can tilt the odds in our favour by living relatively healthy lives.
- Get rid of credit cards if you can’t avoid the temptation of overspending on them. If you can’t afford it without a credit card, then don’t buy it. Cards are fine though if the balance is paid off, and they are used sensibly.
- Cut-out the wants, focus on the needs, at least until you have saved enough to be comfortable.
- Pay off any expensive debts you have in full, ASAP, rather than focusing on minimum repayments. 16%-20% per year interest rates, which is normal with some card providers, soon adds up.
- If you are lucky enough to get a pay rise, don’t just spend 100% of that extra money. Same with something like working from home. It has saved people hundreds a month in some cases.
Also, try to avoid being too influenced by advertising when it comes to luxury products.
Advertising is often misleading, in that it implies that we will all be happier if we just consume more things, and that most “cool” and rich people live such a lifestyle.
The situation has only become worse with social media. Now you have adverts like this:
In reality, when we look at the data, wealthier people are much more careful with money than the general population assumes.
It just doesn’t seem that way from the media most people consume. Sometimes the issue goes hand in hand.
A lot of the luxury goods that are purchased are on credit and finance, which distorts people’s impression.
How can I buy Tesla stock from South Africa?
The fundamentals of buying a stock are the same globally. Regardless of whether you want to do it yourself (DIY) invest or use an advisor you need:
- To find a broker, investment platform or bank that can accept you based on your country of residency.
- Fill out an application form online or offline
- Provide anti-money laundering documents like your proof of ID and address dated in the last three months
- Fund the account once it has been accepted
- Trade the shares, ETFs or mutual funds you want to buy. So, Tesla in this case.
There are many providers that can accept for South Africa, including Swissquote and others.
The better question to ask is if Tesla is a good buy. That is a topic for another answer though.
Are shorting stocks really worth it?
I have noticed a commonality both from the data and my own, anecdotal experience.
Over a one-year period, I have noticed that countless people can win from shorting stocks.
Even over a 5–6-year period, many can win shorting stocks. By win, I mean beat the market.
Over a 20, 30 or 40-year period, it is very difficult to beat the market by shorting stocks.
There are many reasons for that
- Firstly, stocks as a group hit record highs regularly. Look at the Dow. It was at 66 in 1900, 2,000 in the early 1990s and is now at 30,400. Now sure, that doesn’t mean the market always goes up. Individual stocks go down and even go to zero sometimes, like Lehman in 2008–2009. Yet you are betting against an asset class which usually rises, as opposed to something which is usually stagnant long-term (for example commodities)
2. As a result of the first point, you need to hope that you can pick the right stocks to short. In the same way a stock picker wants to pick the next Netflix, somebody shorting stocks needs to find the next Lehman or something that won’t perform well. That is very difficult, as there are so many unknown variables. For example, nobody would have predicted a year ago that the airlines would be the big losers due to one of the worst pandemics in history. Even fewer people would have predicted that the overall market would have done well.
3. Now let’s say you do get lucky for a number of years. Maintaining that over the long-term gets harder. Moreover, unlike buy and hold investors, you can’t reinvest dividends, and you face higher average costs due to the buying and selling.
4. The periods when the overall stock market are down isn’t easy to predict. People who get one prediction right, tend to get the next one wrong. A simple example of that was 2008. Few people predicted it. From those that did, 90% didn’t expect the market to bounce back so quickly. Same with 2020. Few saw it coming. From those that did, I would say less than 1% saw such a quick recovery which took months and not years.
Let’s also not forget that everybody now has the same information. If you have special information, that is insider trading, and illegal.
If it was so obvious that company A or B will become the next Lehman, then why wouldn’t everybody do it and profit easily?
You can’t out-research the market based on publicly known knowledge. The problem is though, many people want exciting strategies.
Shorting can sound exciting, and the short-term gains can be huge if you get it right.
It is just unlikely to work long-term. There are far safer, long-term strategies, that have a superior success rate.
Is it time to move away from London?
Historically, there have been two reasons to move to London, NYC and other big cities in the world:
- Job opportunities. This is for people on all kinds of income
- The lifestyle living in a big city affords you. This tends to be for richer people but can also influence young professionals, students and some other people. There are more things to do in a big city.
The first point has been changing for quite some time. The number of people who could work remotely was increasing even before the pandemic.
Now it has skyrocketed:
This means that for an ever-increasing number of people, working for a London-based employer and living in London doesn’t need to be the same thing.
Commuting has always existed, but now people can live further away than ever.
The second point, about lifestyle, has changed due to the pandemic. That could be a temporary situation though.
Longer-term I do think some smaller towns and cities will benefit from this move to remote work.
We have seen decade after decade of people moving into big cities for work opportunities.
That could change now. More people could enhance their standard of living whilst spending less, by moving.
Whether the time is right to move depends on the individual though. Family and familiarity will always keep many people in big cities.
In the answers below I spoke about:
- Are tech stocks a good investment in 2021 given the great run they have had in recent years? What lessons can we learn from the last 20-30 years?
- What’s the best way of investing money in Uganda, or from Uganda? Is it really that much different to investing from other countries?
- Which stocks, stock markets and sectors have fully recovered from the coronavirus and which haven’t?
- What are some of the more aggressive techniques people can use to retire more quickly?
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