Top Quora answers for the week – Part 1

In this article, I will list some of my Quora answers for this week.

How does one stop earning a living and start creating wealth?

If you want to move away from earned income towards unearned income and wealth, you can realistically do that by:

  1. Starting your own business
  2. And/or investing

Everybody thinks they can start their own business, but few succeed:

In most countries the success rate is 1%-10% after a period of say 10 years plus. That doesn’t mean starting your own business is bad.

Merely, most people focus on the wrong things:

  • Ideas over execution
  • Hard work over both hard and smart work
  • Creativity over cashflow.

Most successful businesses are started by people who first got a job in an industry, got good at it and then started their own thing.

So if you want to go down that route, start a business in an area where you are experienced in, because the market doesn’t usually pay for average. It pays for exceptional in most cases.

In terms of investing, it is a tried and tested way to have more unearned income. The issue is time.

Almost everybody can have enough unearned income from investing to retire at 65 or 70.

If you want to have a lot of unearned income from investing in your 30s or 40s, you realistically have to start early or invest a lot of cash.

In either case, it can take 10 years or longer to ensure a strategy starts really paying off.

All a rational person can do is increase their odds of success. Nobody can predict the future or have an 100% perfect plan that has a 0% chance of failure.

To do that, getting good at your day job, learning basic business skills that could help you go it alone and investing asap all help with unearned income.

Which is better to invest in, FAANG stocks or S&P 500?

In recent years, FAANG has done much better than the S&P500:

They have also beaten the Nasdaq and all other indexes. The question is, will it continue?

Historically, today’s losers and tomorrow’s winners, and vice versa.

We can certainly see that in the way that some tech stocks outperformed in the 1990s, only to crash:

There are arguments on both sides. Some would say as more people are indexing, that will increase the value of the biggest stocks on the index, unless they are really going through a bad period.

In other words, even those people buying the S&P500 and Nasdaq indexes, are indirectly buying those top 3–4 stocks, which is contributing to the higher valuations.

Others would say that lockdown and moving more and more to a digital world will help these firms, and unlike the likes of Tesla, they do make a lot of revenues.

Against that, the p/e ratios are very high, meaning that they look overvalued on paper.

You also have some political risks with Facebook, Amazon and some of the other big tech companies.

The regulators and radical politicians might try to break them up.

I would say that a 10% allocation to FAANG won’t cause you any harm.

What I would avoid though is assuming that the past will replicate itself and having a huge allocation to it.

It is better to have a bigger allocation to something which is more diversified like the S&P500, where you aren’t trying to pick a winner.

Holding the S&P500 in conjunction with a bonds and tech-focused index is less risky than going all-in on FAANG.

Has a diversify of funds, so not just technology, the S&P500 or bonds.

As an aside, almost everybody I know that did incredibly well with a stock pick ended up losing to the market in the end.

The reason? Maybe complacency or arrogance. One of my friends bought into Facebook and suddenly saw himself as a guru after his great bet.

It never occurred to him that it could be luck. He subsequently lost out with his subsequent picks.

There is a lesson in that. Most of the people who bought into FAANG in the early days will tell themselves it was their great foresight.

In fact, chance can also play a role.

What financial advice would you give to a 23-year-old who has just started earning?

The biggest ones are:

  1. Don’t say no to opportunities. It sounds obvious but it is amazing how many people, even those that aren’t rich, do this. I will give you a simple recent example. During the worst of coronavirus, one of my British friends put me in contact with an Indian journalist. I wanted her to help me with some things. She works for a major publication over there. I offered her more for a part-time role than her normal full-time salary. To cut a long story short, she didn’t take the opportunity. Was it laziness? Or was it just that she is comfortable enough so doesn’t want extra income and work? Either way, take good opportunities that are presented to you
  2. Invest ASAP – every penny you invest now will be worth much more than what you invest at 50. Don’t time the markets. Invest from a young age and you can get rich, albeit slowly, from even a middle-income.
  3. Watch your spending habits – most people look back on their teens and early 20s with happiness. Yet few people have as much money in their early 20s compared to their 30s. Despite this, many people in their 30s and 40s assume they need to spend much more than they did barely 10 years before to be happy. If you are happy now on your present income level, don’t assume you need to dramatically increase that amount once you start earning more.
  4. Read a lot – especially focus on some core subjects that can help your career, health, wealth etc. University is the start of the learning process, not the end.
  5. Make (the important) things a priority – most men would find time to date a model and find money for the same activity. Therefore, when people say things like “I don’t have time to read” or “I don’t have enough money to invest even tiny amounts at 23”, it is about a lack of priorities.
  6. Make sure you don’t prioritise the unimportant things – most friendships are shallow and most people don’t care as per the quote below. You don’t need to impress general society with flash spending or Instagram posts, or “friends” who you realise many years later are shallow. Focus on the important people; real friends, family, partners, clients etc. You only need to impress a small number of people in life.

6. Focus. Focus + persistence often beats patience alone.

7. Play the numbers game. Persistence is great but don’t just focus on trying to do the same things over and over again. If you keep trying, persistently and with focus, whilst also playing the numbers game, it gives you a great advantage. If you are in business and you try 100 different techniques, it is more likely to work compared to just focusing on 1. The same with friendship groups or in any area where you need traction. You need to cast your net wide enough. The reason is simple. Being unknown is much worse than even being infamous. You can be the best person in the world, have the best products in the world in business, and still have no friends and no traction in business if you just expect things to come to you from passivity.

So basically, focus on all aspects of the wealth equation. Income, spending and investing.

Often wealth is like a clock. If one side of the equation doesn’t work, the whole side doesn’t work.

If you earn 500k but spend 501k that isn’t as effective as earning 60k after tax and spending 50k.

If I have a portfolio 60% stocks and 40% bonds and stocks keep going up and bonds keep going down, then rebalancing means I keep buying more and more bonds. If the bonds never come back, was I better off not rebalancing?

If stocks did better than bonds ever single year forever, then you wouldn’t need to buy bonds or rebalance.

It is true that most stock markets have always beaten bonds long-term. In fact, they have ran rings around bonds and that gap could become bigger as interest rates are so low.

However, bonds do outperform during the bad times, as they showed in 2008 and March 2020.

That is one of the reasons for these figures:

So what bonds does is reduce the volatility, and the chances of being down over a 5–10 year period.

However, on average, your returns are likely to be lower over the long-term, with a 60–40 portfolio.

As an aside, bonds very seldom “keep going down”. Especially the short-term treasury bonds.

They pay even less than the long-term bonds, but when the going gets tough, people place money there.

Look at March. Even medium-term bonds went down. The only asset that really went up during the worst days of the crisis was short-term treasury bonds.

Stocks, gold, silver and other commodities all went down during the very worst days for stocks.

So they are a good tool every 10, 15 or 20 years when stocks really go into a downward spiral.

I would stick to 90%–10% when you are young. 60%-40% works in middle-age or especially in retirement.

How come GDP growth is 2% but the S&P appreciates by more than 10% in some years?

The S&P500 is the cream of the crop. It is 500 of the largest firms in America and the world.

These firms can change of course, with even big names sometimes going bust or being knocked off the index.

However, the biggest 500 firms, even if there is always a changing of the guard, get bigger as there is competition at play. What was innovation in 1900 looks old fashioned now.

So a firm like Netflix, as an example, can of course growth by 50% in the next year if it wanted to. It is focusing on the world and not just America.

Beyond that, stocks don’t reflect the stock market. Look at China. Great economic growth after 2006, but awful stock market performance.

You also have to remember that:

  1. 9%-10% is the average only if dividends are reinvested
  2. During certain time periods the S&P500 does much better than the average (82–99, 2010–2018) and other times much worst (2000–2010). 10% is merely a long-term average
  3. The economy can do badly and the stock market well, and vice versa. They are more like cousins rather than siblings
  4. In a “winners takes all economy” it is possible for the cream of the crop to get more profitable and most smaller firms to struggle. Look at lockdown. It was great for Amazon, Netflix and many other firms but bad for small businesses
  5. It is possible for firms to remain unprofitable for years and their stock market price to rise – take Tesla even though they aren’t on the S&P500 yet.
  6. There is virtually no correlated between most events (elections, GDP growth etc) and the stock market over any long period of time.
  7. In a global world, the stock markets often aren’t very domestic. Many firms listed on the S&P500 have the majority, or a sizeable, chunk of their revenue coming from overseas markets.

I think these points are hard for many people to understand as they do seem counterfactual.

People assume that African and Indian stocks will outperform in the next 40 years years, in the same way that people thought Chinese stocks would do well recently.

Often it just doesn’t happen.

What is the secret of Michael Jordan’s great wealth?

There is no secret. Just marketability and a personal brand which lasted well after retirement.

Most sports stars are broke after retirement. 60% of basketball players, even some of the top earners, are said to be broke within 5 years of retirement.

The reason is simple. They got used to a lot of money but then couldn’t monetise much after retirement.

So unless you dramatically decrease how much you spend, which isn’t easy for somebody who got used to earning millions, it isn’t easy to manage your finances.

In comparison, Jordan has continued to monetise well after retirement.

Just recently he was involved in this film which was shown on Netflix.

We can see the same commonalities in other sports as well. Most people know about George Foreman, because of his marketing activities:

He is said to be worth $300 million and yet he was bankrupt during the early years of his boxing career.

In comparison, Joe Frazier was broke before his death, but was considered the better boxer:

He isn’t as well known, and didn’t make as much money after retirement, as Ali and Foreman, but was a great boxer.

The market only cares about perceived value, not actual value, so rewards sound business and marketing decisions over pure natural talent in areas like sport.

Look at soccer/football. David Beckham was never considered as good as somebody like Zidane or the Brazilian Ronaldo.

Didn’t stop him making more money though.

What education does not usually lead to wealth?

Conventional education doesn’t usually lead to wealth. The education system teaches people to get good grades, go to university, get a good job and save for retirement.

It can work for some people but ultimately it is getting harder, and leverage is one of the keys of wealth.

More specifically:

  • Leveraging other people’s time if you are a business owner
  • Leveraging your money using time (compounding investment returns rather than saving)
  • Leveraging scale. Charging an hourly rate vs having your products online at all times.
  • Leveraging other people’s ideas, and executing ideas that most people won’t.

Also, no degree or education guarantees wealth, and no education means you can’t get wealthy.

University should be the start of your learning process, and not the end.

Getting a degree can be worth it. In fact, it is often needed if you want to do things like emigrate.

I have been asked for proof of it by immigration department on numerous occasions.

But focusing on both self and formal education, alongside thinking out of the box, is more important than merely relying on a degree to set yourself up for the rest of your life.

Getting a very specific education like medicine or veterinary science merely helps you with direction.

So in the early years of your career you are more likely to make more cash if you are more specialised early on.

It is always sensible to focus on where you want to be at 30 or 35 after graduation and not on how much you could be earning at 25.

Having inherited money, what is the recommened investment in the UK to grow it quickly?

I wouldn’t focus on growing it quickly, unless you are prepared to lose the money or part of it.

The only way to grow money very quickly from investing is to take huge risks such as going all in on one individual share or other high risk bets.

Instead, what I would do is focus on a well balanced portfolio. For example, 40% in the FTSE All Star, 30% in the S&P500 and 30% in government bonds.

If you buy and hold that kind of investment strategies for a long time period, it will grow a lot.

$1 or 1 pound has grown exponentially even adjusted for inflation taking such a strategy.

It also tends to grow under most kinds of political administrations so you don’t need to worry about things like elections harming the strategy if you just hold onto it during the bad times:

Also reinvest the dividends over time. That makes a huge difference.

Look at the FTSE recently:

What did Nathan Rothschild mean by “The time to buy is when there’s blood in the streets, even if the blood is your own”?

Basically, a rational investor should celebrate if the markets are down, assuming that he or she is able to buy more.

Let’s say an investor has $1,000,000. That $1,000,000 might have gone down to $500,000 in 2008–2009, even if you had some bonds.

However, if you would have stayed calm, rebalanced from the bonds and kept buying more, you would have benefitted from the big falls.

Same in 2020 (March). Let’s say an investor who had $700,000 in stocks and $300,000 in bonds.

The bonds would have risen if they are short-term government bonds and the stocks fallen hard.

Therefore, if that investor would have rebalanced from the bonds to the stocks + bought more during the downturn if they had cash, they would now have much more than $1m.

If markets had stayed low for years or even 10 years, that would have benefitted a long-term investor.

A great example of that is the Great Depression of the 1930s. The stock market fell 90% from 1929–1933 and then started to rise.

However, it stayed relatively low throughout the 1930s:

If somebody would have had $10,000 invested at the height of the crash and added say $1,000 a year throughout the 1930s, they would have actually done quite well.

The reason? 1930, 1931, 1932 and 1933 was such a low moment for markets, that they would have benefitted from those lower prices.

A young or relatively young person that started investing in the 1930s only to retire in say the 1980s, would have made a fortune due to these lower valuations.

That doesn’t mean you should wait in cash for markets to crash (market timing).

It merely means you shouldn’t be unhappy if the markets fall hard.

It merely gives you a chance to buy at lower prices. When markets do eventually recover, which they always have done historically in the US and most major markets, you will make more than if they had just continually went up.

How did people invest in equities prior to the inception of ETFs?

They invested in either individual stocks, actively managed mutual funds or index funds rather than index-linked ETFs.

What many people don’t know is that the founder of low-cost index fund investing, Vanguard’s founder Jack Bogle, opposed ETFs.

The reason? The expense ratios are similar but you can sell them more easily.

The only practical difference between Vanguard’s S&P500 ETF and Vanguard’s S&P500 index fund, is the ability to sell it more quickly.

This can be a bad thing as Bogle said here:

He also made this astute observation about many ETFs like cannabis or energy ETFs or something very specific:

I am not saying ETFs are bad. If you buy and hold them, you will get the same returns as somebody who buys the index fund.

Merely, many studies, including Vanguard’s own research, has shown that people who buy ETFs are more likely to panic during the bad times like 2008 and March 2020, compared to those that buy the index funds and invest through advisors.

The reason is human nature. There is less of an incentive to sell if you can’t for days.

In the traditional index fund, after you sold it, it would take days to liquidate.

That reduces the incentives to sell, compared to if you can liquidate the money instantly and buy another position a few seconds later.

Net outflows from Vanguard were at their highest during periods of market downturn, and net inflows were sky-high during bull markets.

Is it a good time to invest in Tesla?

I will make no predictions about whether Tesla will go up or down.

All I will say is that it looks overvalued on most major measures. To give you some comparisons:

Even Tesla shareholders think it is overvalued:

Including Elon Musk himself:

People investing in Tesla are betting on its potential rather than its current cash-flow and results.

That potential might be realised or might not be, however it is a speculation.

So two things are likely to happen:

  1. Tesla will fall
  2. Or Tesla will realise its potential

However, a rational investor can only invest based on the information that he or she has available at the time.

It doesn’t make sense to buy a house based on the pitch that “this area will grow by 2025 so my house is worth 3x more than the others in the area”.

Many people are making the same bet with Tesla. They might win or lose, but it is still a gamble compared to buying the whole market or indeed entire tech index (the Nasdaq).

If you want to make a big bet on an individual company, which often isn’t wise as 98% of stock pickers lose to the market long-term, at least focus on a firm that has positive cashflow as of today.

Why should one not become too rich?

Having more income or wealth isn’t a bad thing. In fact, it is usually a good thing for most people.

The problem is how people use that money or wealth. Many people assume that more money will bring about less problems.

The reality is, money decreases your problems at the lower end. Going from low-income to comfortable will make a huge difference to most people.

Above mid-income, you will only become happier with more money if you spend it more wisely.

That means spending more money on:

  • Helping others
  • Economic security for yourself and your family
  • Buying time to spend it with your family and people you care about.

Spending more and more on things won’t make most people sustainably happy, assuming they are already comfortable to begin with.

Going to a 4 star or 5 star hotel won’t make a huge difference but being able to stay in a 4 star hotel over a hostel might well make you more comfortable.

The same is true for almost any service or product out there. It is the law of diminishing returns or declining marginal utility:

If you drink a cup of water after a long hike, it feels like a luxury. The second one tastes worst than the first one when you were more desperate.

The third one tastes worse than the second one and much worse than the first one.

And so on and on until you will refuse the water because it will make you sick.

Yet it is the same product, only its utility diminishes the more you use it.

So there is nothing wrong with wanting to better yourself and get wealthy.

The problem comes with expectations. If expectations are too high, people get disappointed by the reality.

Those that get happier after accumulating wealth are usually like that because of the choices they made.

Those choices were made easier because of wealth. For example, spending more time on physical health rather than using wealth to fix their health.

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