In the answers shared today I focused on:
- What habits and mindsets are needed to become a successful business owner or investor?
- What are some of the things that the average person gets wrong about investing? I look at the 1990s to explain an important concept.
- Why do many people hate successful people? What does it show about them?
- Everybody makes mistakes – poor and rich people. Yet what mistakes are poorer people more likely to make, and make specific mistakes are richer people more inclined to make? Also, is it possible that some people that have relatively poor salaries are actually quite wealthy?
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What mindset and habits should one cultivate in order to become a successful entrepreneur or investor?
The two areas are quite different. Business is a competition, like sport, as this famous book points out:
The two areas are quite different. Business is a competition, like sport, as this famous book points out:
That doesn’t mean that everything is a zero sum game. As GDP rises around the world, more businesses and entrepreneurs can make it.
Yet you are competing against others on a daily, weekly and monthly basis.
This makes the following habits important:
- The ability to read and keep learning
- Keeping abreast of new trends in the market
- Moving fast on new trends when needed
- Taking calculated risks
- The ability to work hard and smart
- A competitive mindset.
Investing in public stock markets is very different. When it comes to publicly-listed firms, all the information is available online and offline in a transparent way.
Spotting trends in the world we live in now is more difficult than in the days when Buffett and others would “out research” others.
What is often more important in investing isn’t knowledge about trends, business and countries, but behaviours like:
- Patience. Being long-term
- The ability to stay calm. This is especially the case in a crazy year like 2020. Stock markets are up by 10% or more in the case of countless indexes, yet so many people panic sold.
- Being diversified, especially as you get older.
- Starting the investment process early. Investing small sums for half a century from 20 until 70, will likely investing large sums from 50.
- Not necessarily focusing on competing against others by trading actively.
Somebody who isn’t especially knowledgable about investing can beat.
Somebody who isn’t especially knowledgable, and doesn’t work hard, can beat somebody doing all the research in the world, when it comes to investing.
The average person who has bought and held 3–4 indexes or ETFS in the last few decades would have easily beaten somebody who is knowledgable about investing but emotional (panic selling when the markets are down and so on).
I have lost count of the number of people who only invest in their sector (doctors investing in pharmaceutical companies as an example), only to end up losing to an ETF.
So, they are two different disciplines, which require different habits.
In investing, doing nothing can be very profitable. In business, staying still seldom is.
The ability to be patient and think long-term is one commonality though.
What are some things that the average person often gets wrong when investing in stocks?
In the 1990s, there were plenty of people who made a lot of money from picking individual stocks.
I remember I met an American guy when I was on holiday in Cambodia.
He was siting next to me on the bus back from the capital, Phnom Penh.
He admitted to me that he made a lot of money trading stocks in the 1990s, but it was probably luck, as shown by the 5 years after that (2000–2005).
So, he now admits it was luck, but back then, he saw things differently – it was all his knowledge and foresight you see.
We see similar trends in 2020:
Markets have had a pretty good 2020, despite the craziness in the middle.
The Dax in Germany is at records, as is MSCI World and all three major US Markets indexes.
The S&P500 is up over 10%, with the Nasdaq rising about 40%, from just over 9,000 on January 1, to close to 13,000 today.
What’s more, it has almost doubled since the worst of the crisis in March, and some individual stocks have risen by incredible amounts.
Tesla is up by 7-fold, with some tech stocks up more than 10-fold.
All of this has resulted in some market timers and stock pickers having an even better year than the average buy and hold investor.
I put some in bold because many market timers simply panic sold when markets crashed earlier this year, yet again.
The point is though, short-term performance is no indication of a longer-term trend.
Stock pickers have a 20% chance of beating the S&P500 over 5 years, and well over 30% in any given year.
If you stock pick for decades, you will beat the S&P500 very easily some years, and probably even manage to do it for 5–10 years.
Yet if you continue for an investing career, your chances fall to about 2%-5%.
Beating the S&P500 or even MSCI World over a 40-50 year career if you start investing from your 20s, is very difficult indeed.
Yet few have the foresight to see this. The thinking is that the recent past will replicate itself (recency bias).
You see the same pattern when it comes to things like gold and unfashionable markets like Japan.
People become interested in gold once a decade or so, when it is in a bull market.
They have only recently become interested in Japan and emerging markets, after both have started to perform well in the last year.
Every dog has its day in investing, which is why putting 100% in a “hot” sector seldom makes sense.
Many people have also recently put 100% in US Markets, even non-Americans, because of the recent performance.
Whilst this isn’t a big issue as the US markets are global in nature, international markets also regularly outperform US ones, as they did from 2000 until 2008.
People were least interested in US Markets in recent times during the unfashionable periods to hold such positions like in the early-mid 2000s when everybody was obsessed with emerging markets.
Why do many people hate successful people?
I have came to realise something. If somebody is truly effective at what you do, many of the things said about them will be negative.
There are many reasons for this. Envy is one. Another one is what it says about the other person.
Often criticising a successful person is more effective than looking in the mirror and making changes.
If you can persuade yourself that a successful person is either more corrupt than the average person or luckier than you are due to inheritance or another reason, then why try to emulate and learn from the success you see?
One of the most successful people I know is always criticised online by financial firms.
I don’t want to say his name as it is a small world now and Google knows all!
Anyway people say things like
- He got into the industry at the right time
- His business practices haven’t been ethical
- He just got lucky
Yet many people got into the same niche at the identical time. Many of those businesses were no more or less ethical.
Most people, both successful and unsuccessful people, have negative as well as positive traits.
It is just easier to assume that the success was either down to an unfair advantage, or something which you can’t control like “getting in at the right time”.
You see the same in sports. Many players are criticised as only being successful because they cheat, had good/rich parents and so on, despite many people doing the same things.
What is more rational is to learn from all people, but especially successful people – even those successful people who have negative traits as well as positive.
If you learn from other people’s success without directly copying, in other words taking other people’s methods and adapting them to your strengths and model, you can get ahead.
People who get ahead often realise “if he/she can do it, I can too” rather than thinking the success was all done to unfairness or luck.
Yet successful people shouldn’t really care as the quote below says:
Ultimately, it is none of our business what other people think about us.
What mistakes do the poor often make and what mistakes do the rich often make?
Everybody makes mistakes. The biggest difference is how you deal with mistake/adversity and if you keep making the same mistakes time and again.
People who stay poor their whole life are more likely to make the same mistakes over and over again, and those mistakes tend to be:
- Too much money spent on vices like gambling, alcohol etc, which can indirectly result in other problems
- Overspending. There are plenty of people who are relatively poor, living pay cheque to pay cheque, on all sides of the income divide. An estimated 10% of high earners are said to live pay cheque to pay cheque as an example.
- Just focusing on consuming and not production
- Not investing money from a young age. Either saving it (0% interest rates) or just spending it. People who climb out of poverty tend to realise that small habits, over time, like investing from a young age, can make a huge difference. People like this – The Janitor Who Became A Multi-Millionaire by Retirement | The Motley Fool and this A 96-year-old secretary amassed a secret $8 million fortune—here’s how. They realised that you don’t need to earn a big salary to get wealthy slowly
- Linked to the last point, not focusing on educating oneself in areas like personal finance and anything that can result in improvements. Until this stuff gets taught better at school, it is the responsibility of families and individuals to educate themselves.
Often a combination of the wrong choices, bad luck and not coming back from those hardships, causes problems.
When it comes to richer people, by far the biggest mistake made is complacency.
People assume that the past will replicate itself. Often it doesn’t.
Every dog has its day as the saying goes:
There are higher achievers, and those with more natural talent and better work ethic.
Yet most people, no matter how talented, can go through a bad patch.
Most people, if they are persistent enough, can have a good run as well.
Yet most richer people assume that the good times will keep rolling, in the same way that plenty of people who are struggling give up.
Then something like Covid comes along, and people realise that they should have taken risk more seriously.
You see it after every crisis – people not planning for the worst. You saw it this year with Covid and the lockdowns.
Few companies and wealthier individuals in the face-to-face economy prepared for this black swan.
You saw the same thing during The “Great Recession” of 2008–2009 and after 9/11 in the airline industry.
Ultimately, most people, no matter what their circumstances, can fail or success, regardless of past performance.
Human nature means we are wired to either be complacent or lose faith, due to assumptions that the past will replicate itself.
In the article below, I spoke about:
- What should you do to invest successfully, and for that matter, see improvements in your financial life? It isn’t all about big sudden improvements either. The answer below looks at how incremental improvements makes a huge difference long-term.
- What happens once people have money and power? What motivates them? Of course it depends on the person, but I consider some of the main reasons some wealthy people give more money to charity as they get older.
- What percentage of your wealth should be invested in “risky” assets, if any, and how do I define risk? Too many times people confuse volatility as risk.
- Was investing just “created” as some kind of conspiracy to make the rich get richer? I tackle this ridiculous suggestion in my last answer.
To read more, click below