What’s the craziest statistic about personal finance?

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

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What’s the craziest statistic about personal finance?

It is hard to shock me these days. However, one of Warren Buffett’s stories he told on CNBC really made me stand up and take notice.

In 1941, the world was in a gloomy place. We think that we are living in unprecedented times today, but back then was much more extraordinary.

Hitler was winning the war, which was the second world war in a generation. Large parts of Europe and the world were in disarray.

The US didn’t even come into the war until Pearl Harbour:

The future looked bleak. The future looked almost as bleak during times like the Cuban Missile Crisis.

Yet $10,000 invested in the S&P500 in 1941 would be worth over $50m today. — warren buffett $10,000 invested in S&P 500 in 1941.

Now sure you have to account for

  1. Inflation. The nominal 10% yearly returns are cut to 6.7% adjusted for that
  2. The returns have varied. So of the years and decades after 1941 have been bad for stocks, like 65–82 and 2000–2010. Some years, like the 1990s and 2009–2020, have been much better
  3. You need to reinvest the dividends to get those returns
  4. Only people who created generational wealth would have gotten those returns.

Nevertheless, it shows the power of investing for decades, and not caring about what happens in the middle.

It also shows that we have always lived in extraordinary times in some ways, so it is best to ignore short-term news like market crashes, virus, elections and so on.

Other incredible facts are

  • The average investor’s returns are about 40% of what the index produces. This is often precisely because they assume “this time is different” every time an event like a virus, a 9/11 or crash happens. They sell out basically.
  • During the crash of 2020, 35% of over 65s were estimated to have panic sold between March and May.
  • The dead outperform the living in investing. Those that forget about their investment accounts do the best amongst the living! They can’t panic by definition……
  • The average British and American person only has about 10,000 invested for retirement and most don’t have a workable alternative like a passive income generating business.
  • 80%-90% of many leading stock markets is now controlled by institutional investors and wealthier people. There has never been a strong correlation between the stock market and the economy, but these days, the correlation is even weaker. Stocks can do well during recessions, or badly during good economic times
  • In fact, about 80% of the stock market is now automated
  • On average a stock market correction happens every two years. So, falls of 10%-20% or above are very normal. There have been countless 35%-50% corrections since 1941!
  • The Nasdaq has beaten all other markets in the last 30 years, going up by about 12% per annum. Yet it decreased by 70% after 2000, and another 50% during 2008. It took about 14 years to recover from 2000. That didn’t stop the long-term investor from doing well though if they were patience enough.
  • The Chinese Stock Market has halved in value since 2006. During the same time, the S&P500 has gone up by 200% and the Nasdaq about 500%. This once again shows that growth and markets aren’t always linked.
  • The S&P500 has historically gone up in about 70% of years. It has never been down over a 25–30 year period.

The stock market rose from 1918–1920, despite a pandemic and world war. They have also risen during most government shutdowns as per the graph below. So, this “trend” of markets not being predictable isn’t really anything new.

Which is better: a job or a business?

Countless new businesses go out of business as the chart below shows:

The question is, what is the main reasons businesses fail? Lack of market need?

The economy? Or perhaps bad luck? No, one of the biggest reason is inexperience from the owners.

Owners that have previously had jobs, and then created a job in that same industry, are more likely to succeed.

They have the skills, contacts and sometimes clients to start their own business.

Some know they can have revenue in month one of starting a business.

Starting a new business and a complete start up isn’t always the same thing.

So, for the vast majority of people, the best way to start a business is to get a job in the area first.

That doesn’t mean that some people won’t succeed with zero experience in an industry.

Some people can start successful businesses at 18, 19 and in their early 20s.

That doesn’t change the fact that these are exceptions to the rule.

But now let’s say you have had a job for 5–10 years and you have gotten good at it.

You are paid comfortably. Is it good to start your own business? It depends on many things, but the following people shouldn’t start their own business:

  1. Those that can’t manage cashflow, marketing, sales or any other key function. A business relies on money coming in being less than what is going out. If you can’t control some of these processes yourself, you could get into trouble. That doesn’t mean you have to be a world class accountant, marketeer or salesperson to start your own business, but you ideally need to know the basics at least. In general, I have noticed that people coming from the sales or accounting side of businesses fail less often if they start their own business. People who feel like they can outsource the whole process often fail.
  2. If you think it is all about the idea. It is all about the execution.
  3. You are relying on trends, the good economy or politicians. These things come and go. Remember the trend below in the early 2000s in many countries? Internet cafes were huge. It came and went. Sure, some still exits – the best ones. But that’s the point. In a good market, many providers can thrive. You need to be able to thrive in a poor market.

4. You can’t manage risk. There are many risks of being a business owner. Those include cash flow risks, country risks and one-off risks as the coronavirus has shown. Owners need to diversify, be adaptable and/or move quick. Look at 2020. Which businesses are doing the best? Those businesses that went online years ago, when it was clear that the world was moving online. Yet many business owners waited until the pandemic to pivot, even if they were in industries that can work well online. That is often because people get into their comfort zones.

5. You only care about status. There are plenty of business owners that go around with flashy cars, big offices and VC money. That is irrelevant if you can’t pay the bills at the end of the month. I know a bunch of very profitable firms being run out of homes and others fighting for their lives, despite having the appearance of success.

6. You can’t be persistent, tough and focus on the long-term.

7. You are very risk-adverse or don’t take risks seriously at all. Calculated risk-taking is needed.

For most people, being a salaried employee or working in an affiliate structure (self employed capacity) can work better than running your own company.

If you can make 50%-80% of revenue without having the stresses of running the whole show, you might be better off like that.

There is maybe 20% of people that can deal with being an owner.

What kind of business I can start with zero investment?

I will tell you how to start businesses with close to zero investment. At the end of the day, you often need very small amounts of investments to get going.

Some examples of how to do this are

  1. Get a job first
  • Become good at it for 5–10 years
  • Then if it doesn’t go against the NDA or isn’t too risky, you can start your own business with some of those clients. Even if you can’t take your clients with you, you have the skills to get new clients, depending on what your function was in your job
  • Most people don’t want to take the get rich slow approach. Yet statistics show clearly that business owners with experience do better than those that are very young. That doesn’t mean it is impossible to start a business at 18. It is just more difficult
  • If you are in the services industry, this is easier. In capital intensive businesses, you often need to invest some of your own money.

2. Internet arbitrage

  • Most people won’t do this if they have pride
  • However, there are loads of free stuff online being sold on websites like Craigslist
  • If you buy for free or cheap online, and sell on, you can make a profit
  • It is so simple, but most people don’t want to do it, so it isn’t as competitive as you might think

3. Use other people’s platforms

  • Sometimes you can just freelance and set up your own limited company, or just formally declare yourself a freelancer
  • You can use websites like In-demand talent on demand.™ Upwork is how.™ to find clients, or write on the Medium partnership program if you are good at writing
  • Affiliate marketing would be another example
  • It will take a long time to build up in most cases though
  • Using YouTube and other social media to link to your website or even monetise directly once your channel is big enough.

Of course though, it also depends on your starting point. If you already have a big internet presence online , or you have your own clients, it is easier to start something new with very small sums of money invested.

The biggest mistakes people make are focusing on ideas and not long-term execution, in addition to thinking short-term.

It can take years to build something up. That is a good thing though. If something was too easy, then eventually the competition would become too intense.

There is money in doing what others aren’t willing to do. There isn’t a lot of money in coming up with great ideas without good execution.

Why does the election affect stock markets?

Historically there have been a number of commonalities:

  1. Firstly, volatility rises in the weeks and months before an election. That doesn’t always mean downwards only though
  2. The US Markets are usually up on election year
  3. Markets historically perform better during times when incumbent Presidents win. The average yearly returns (during the election year) have been 9.3% if a new President is elected and 13.4% if the incumbent is elected.

4. US Markets have done better during election years than the year after but there have been many exceptions such as last time. For international stocks the reverse has been the case – returns have been better in the year after a US election.

5. The 2000 disputed US Election between Bush and Gore didn’t really affect markets. The 1982-January 2020 bull market wasn’t really interrupted by the uncertainty.

The bottom line is don’t read too much into this. Markets could go up if Biden wins or down.

They could go down, or up, if Trump wins. They could crash or even go up if the election is disputed.

Markets have regularly hit record highs after unexpected events. Look at coronavirus or 2016.

US futures fell 5% after news of Trump’s election. All the usual “analysts” were doing their usual doom and gloom by sharing things like this online:

24 hours later and markets were up 1%. Two years later and they had soared:

Even his supporters didn’t expect that. Almost “everybody” assumed that US Markets would react to the news of Trump’s victory like the UK FTSE reacted to Brexit – a crash and then recovery 1–3 years later.

Anything can happen so best not to worry about it. Just stay the course. So, in answer to your question, US Elections don’t affect the markets as much as people say.

The existing trend is often more important. If Bush and Gore disputed 1999–2000 election result came during a bear market, then maybe stocks would have fallen on the uncertain.

Instead they rose slightly.

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