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Is there a reason why everyone cannot be a millionaire?

In this blog I will list some of my top Quora answers for the last few days. 

If you want me to answer any questions on Quora or Youtube, don’t hesitate to contact me.

Is there a reason why everyone cannot be a millionaire?

Source: Quora

In most developed countries, almost everybody can become millionaires.

If you look at the statistics, you don’t need to invest much, on a monthly basis, to become a millionaire, or even multi-millionaire by age 65 or 70:

main qimg 27d62c0587ea1baadb965f5c4c96a7f9

As this book showed, most millionaires are just middle-income and middle-aged, and few have inherited the money:

main qimg e412e35fdf730f1124c17bab6cfce3d0

A few years ago, a new book was written called “The Next Millionaire Next Door”, which looked at whether the original research was still valid considering how much the world has changed.

The authors found most of the factors influencing wealth have remained the same.

I have personally seen countless middle-income people reach millionaire status, and plenty of high-income people become broke.

The main commonalities between people who reach millionaire status are

  1. Starting the investment process early
  2. Being willing to make sacrifices. That could mean starting early, or investing aggressively.
  3. Being willing to take calculated risks in business, life and investing.
  4. Taking advice. A Yale University study (more on that below in the reading section), found that millionaires are more likely to take financial advice. In comparison, most people who don’t reach millionaire status are more likely to make decisions based on friends, family, general society and sometimes online reviews and opinions.
  5. The ability to control emotions by yourself, or with the help of an advisor, when markets crash. In comparison countless people panic sell during moments like 2008 and 2020. That is costly – Panic selling may cost ten times more than waiting a few weeks
  6. Bad decisions. Divorce, overspending and mid life crisis are one of the reasons why people don’t get wealthy. Most people who inherit money become broke. 60%-70% of professional footballers and basketball players also suffer bankruptcy after retirement. So, a high income isn’t enough.
  7. Adapting to changing times where needed. We have seen this in 2020. Some businesses failed because they didn’t adapt to Covid. Those that have succeeded often pivoted online years ago, when it was clear the world was moving in that direction in any case.
  8. Linked to point 7, being willing to take yourself out of your comfort zone. Nothing good comes out of the comfort zone. If something makes you feel uncomfortable, then that can actually be a good sign.

Ultimately, there is no guaranteed route to success. In the same way you can have a heart attack at 35 even if you eat healthy and exercise, you can sometimes fail even if you make the right decisions due to bad luck.

What you can do, however, is dramatically increase the odds in your favour.

How do you think today’s low-interest rate environment is impacting the time value of money? How might this change the value of an asset or a liability?

Source: Quora

In general, low interest rates reduce the time value of money, and therefore make:

  1. Bonds become less attractive compared to stocks. Bonds are always less attractive compared to stocks for the long-term investor. In the 1970s and 1980s, however, you could make a lot from bonds. Even in 2000, bonds paid about 6%, when stocks looked overvalued. Therefore, it was attractive to have 50% of your portfolio in bonds. These days, bonds can be important, as they tend to do well during moments of fear like 2008 and Feb-March this year. At least short-term government bonds. So, they are still a rebalancing tool. The graph below shows that even before 2008, the general trend for bond returns was lower.
main qimg fa31c1ba92a6aa64448805e6b4722708

2. Cash becomes much less useful than stocks – Again, it should be noted that, long-term, cash has always been beaten (easily) by stocks and even bonds. Cash has never been a good long-term investments so tends to be used by people for emergency funds and to cover emergencies, or by those that wrong assume that all investing is very risky. What has changed is real interest rates. In 2005–2007, many savers in the UK could get inflation +2%-4% in the bank, as many banks paid above the Bank of England’s official exchange rate. Historically, cash has paid inflation +1%-2% if held in the bank. Since 2008, however, interest rates have been negative across almost every major country. These days, then, cash is a guaranteed loss to inflation, unless there is 0% inflation or deflation for a prolonged period of time.

The bottom line then is that there is a search for yield during moments like this. Mostly, money is going into the stock markets.

Some might go into property too, although right now with the economy being weak, people are weary about it as it is much more connected to the real economy than stocks.

The S&P500 is mainly controlled by institutional investors, whereas you are more likely to lose your tenant during periods of economic slowdown.

Nevertheless, eventually this search for yield might also push property prices higher.

It happened in 2008–2009 as well. In many emerging markets, and big cities in the West, property prices were pushed higher, and stocks skyrocketed.

I am not saying the same thing will happen this time, but few people and institutions want to get 0% in the bank.

In 2018–2019, when US interest rates were briefly positive after the Fed increased rates, we did see some cautious investors keeping money in cash, as getting 2% or 2.5% at least beats inflation.

That changed after 2020 and coronavirus, and rates have been negative in Japan, the Eurozone and the UK for over 10 years.

This time as well, inflation might eventually pick up. 2008–2020 has been a period of low inflation by historical standards, at least in developed markets.

If more companies in manufacturing relocate back to their home countries (localisation) due to the perceived risks of global supply chains, then we could see a pick up in inflation in a few years.

Can leverage make you rich?

Source: Quora

The simple answer is yes. Remember though, leverage is also riskier.

People who don’t control leverage, can become broke pretty soon, if things go wrong.

Leverage is mainly used in two situations:

  1. Business
  2. Real estate

Take real estate as an example. I personally know a few people who went broke after 2008–2009.

What they did was use debt/leverage, to expand. Then things went wrong after Lehman.

The banks wouldn’t lend to them and property prices went down.

People wanted to sell their properties too. So they, as a business, needed to sell off properties to pay the bills.

A vicious cycle was the end result, and they went out of business.

Even if you are an individual investor, you can get into negative equity in a falling real estate market, if you are too leveraged.

Likewise, we can see the same thing with stocks. Now that the cost of debt is so low, many people are asking a simple question.

Why not use debt to buy ETFs and other investments? The markets have gone up by an average of 8%-10% per year historically, and are unlikely to fall over a 10–20 year period, after all.

The issue is, you are taking a big risk. If the markets have a “lost decade” like in 2000–2010, you would still need to repay the interest.

In comparison, a buy and hold investor wouldn’t need to care if that happened.

The same is true in business. Debt can, and will, increase the size of your business if used correctly.

But again, it isn’t a free lunch. It is riskier and you either need to get money from:

  • The banks
  • Private investors like the people pitching on shows like Dragon Den and Shark Tank.

Those people can control your decisions, to some extent, as a business owner.

The below example from the corporate finance institute shows how this can work:

main qimg 548c509f862bb5472d9602a1254f3382

The key thing is to take calculated risks, and ones you understand, when taking on leverage.

Ask yourself the right questions, such as what would happen if interest rates doubled.

I also find that private business people who only seek outside finance, sometimes don’t want to build up the business organically.

Long-term, that can cause an issue. In most situations, it is best to use leverage (if you use it at all) as “fuel into an already burning fire” rather than trying to get a new business started.

Ultimately, if you already have a successful existing business, it is less risky to use leverage, because you know what works.

For example, if you have worked out that you have been making 20%-25% on Facebook ads for five years, then taking out debt at 3% per year to scale that operation isn’t overly risky.

The danger is always that once leveraged returns work, people get greedy, and start to get ever more leveraged.

That was the big mistake the aforementioned property development company made.

Leveraged worked for them for 25 years…..until it didn’t! Complacency killed their business.

Are there more rich entrepreneurs in their 20s now than ever before?

Source: Quora

This thing has been a game changer:

main qimg 1cc72b902ba66592ab1f3e7245ad84a7

The internet, in general, doesn’t care that much about:

  • Your age
  • Your gender
  • Your location
  • Your religion
  • In-person communication
  • Your qualifications

Sure, these things can come up, and still be important to some people, but they don’t matter as much.

When I wanted to start my own company what did I do? I Googled. I used a firm based in Southern Europe to help me. I didn’t meet them in person.

I also used two recruiters to help me recruit. One lives in Malaysia and one in South Africa. Again, I didn’t meet them in person.

I then found freelancers on websites like In-demand talent on demand.™ Upwork is how.™ who have been living in India, Armenia, Hungary and various other places.

This is completely different to how business used to be done, when people would get called, come to an office, build up rapport etc.

How does this link to your question? Well, younger people are more tech-savvy than older and middle-aged people.

More business is going online. It was before the pandemic and only skyrocketed after.

You can scale more easily online as you don’t need to open up new offices globally if you want to expand in many industries.

Therefore, a small (but rapidly growing) percentage of the world’s wealthy and high-income are young internet entrepreneurs.

Don’t get me wrong, experience is important in business, and people are more likely to succeed in their 30s, 40s and 50s.

It is also true that inequality is much higher amongst younger people than the middle-aged, because of trends like the internet.

Nevertheless, there are certainly more richer people in their 20s than ever before, but also more struggling.

I have personally seen more and more younger people go from one extreme to the other in the last five years, compared to previous years.

So, the good news is that if everybody is struggling today, it doesn’t automatically mean they will be struggling in 3 or 5 years time.

This trend will surely only get bigger as well. So, the future will probably benefit younger people that want to take risks, compared to going for a conventional path.

That doesn’t mean that the conventional route of getting to university, getting a job and retiring on a good pension will be “dead”. It will just get harder to get those positions vs going down a different path.

We see this even today. Going to a great university and getting on an “elite” graduate scheme with some of the big investment banks, law firms and consultancies is one way to get wealthy by your 30s if you climb the ladder.

However, it is a much more difficult way to make good money for most younger people than working for yourself, if you are willing to be persistent.

Further Reading

If you had invested in Amazon twenty years ago, how much would the money be worth now?

Moreover, would it have been rational to invest in Amazon in those days, based on the information that was available at the time?

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