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.
Why is it nearly impossible to save your way to get rich?
If you mean wealthy as opposed to rich, it is very hard to become wealthy from savings alone as opposed to investing.
The reason is simple enough to understand. These days, interest rates are below inflation.
Historically, savings in the bank paid inflation +2% or even more sometimes.
Take the UK as an example:
There were times, as per the graph above, where inflation was running higher than interest rates.
It tended to be for a relatively short period of time. For example the spike in inflation after the oil price spike in the 1970s.
Most years you could make more money in the bank than the rate of inflation.
Since 2008, we have had 12 years of negative real rates, or matching inflation at best.
That means that the only way you can get wealthy from bank savings is if you have a high income and decent spending habits, because you aren’t earning from (real) compounded returns.
By definition then, if somebody has millions in the bank in the future, that won’t be because of great investment returns.
In comparison, with investing money, you can get wealthy from investing a very small amount.
Just a few days ago I was reading an article from the Shark Tank “judge” Kevin O’Leary.
He says that investing just $100 a week can make you wealthy long-term – Kevin O’ Leary says investing $100 a week will make you a millionaire by retirement
He is right if you are in your mid 20s or 30s. However, if you start investing even tiny amounts from your first full-time, or even part-time job, you need far less.
Many of the “millionaire next door” types just started investing tiny amounts from their part time jobs at 18 and 19, and more after university.
That is the difference between saving and investing. Investing is more volatile, with far more ups and downs, but it pays off long-term vs saving.
The only people interested in saving now either mistakably think even long-term investing is risky, or in some limited cases, they have a lot of money to begin with.
You see that with some people that inherit a lot of money. They sometimes assume that can last a lifetime.
In reality though, compounded inflation really eats into even large amounts of cash.
Getting 2% below inflation for 1 year isn’t a big deal or a big loss.
Over 12 years though, like 2008–2020? Over a third of your capital has been lost to inflation.
So inflation is a silent killer of wealth as it “creeps up” on people, and ins’t as noticeable as a one-time 25% loss.
What is the key to success in life?
I am not sure such a broad question can be broken down into three steps.
If I was forced to only think about three steps, with many “sub steps” within them, I would say:
- Define what you want
People want different things. Some people want material success. Others want to help other people, or become an elected politician.
Others want a combination of things. People also want different things, even if they want the same goal.
There are people who want material success so they can have security and help charities, whilst other people want to consume more instead with the same goal.
The point is, people are different, even though we do have the same basic needs.
So define what you see as success, rather than letting society, friends or family define it for you.
Ideally, this objective should be very specific and not wishy washy.
2. Work towards it
Once you know what you want, work towards it, by putting in consistent effort, and trying out different things.
Sometimes working towards something isn’t enough. You also need to work smart, try out different ideas by playing the numbers game and so on.
3. Be persistent
Many people are willing to work hard, at least for a relatively short period of time.
Some people are willing to take calculated risks. Few are willing to take big risks.
What even fewer people are willing to do is never give up. Most people will give up if they aren’t achieving their goals within a few years, and especially 5–6 years.
That is a pity as in reality you don’t always see success coming. Success can be a bit like this:
Countless people, therefore, give up before they see above the surface.
Many top performers have came very close to failure, and would agree with this quote:
Once you achieve success, I would add a fourth one. Never be complacent.
The number of people who achieve success for a short period of time, is much greater than those that achieve it for 10 years.
The number of people who achieve it for 25 years is greater still than 10 years.
People can become complacent and even lazy, once they reach a certain level.
Why do people tend to buy and consume rather than invest their money into ventures that will return more to “consume” with?
There are a number of reasons for this issue. Firstly, as Mario rightly says below, there is a lack of quality financial education at school.
Therefore, many people see finances and investing as either risky or boring.
There is also the issue of delayed gratification. It is one of the keys to success as the quote below says:
The issue is, it is human nature to want the pill and not the diet. It is therefore very easy to do things that make us happy short-term.
Every time we spend money, we do get a quick buzz of excitement, before it goes away.
That means if you are feeling sad, you can deal with the issue through overspending.
Long-term, that won’t make as big a difference to happiness as many free or cheap activities like exercising or spending time with loved ones, but it takes a long-term view to see that.
You also have another issue. This issue was highlighted in the book below:
Are brains are wired to see the past, “the good old days”, as better than it really was.
We also assume that the future will be more bleak than it will be.
So despite the fact that numerous studies show older retirees can be happier than younger people, and feel healthier than previous generations, people find that hard to believe in advance.
So, in much the same way that some teenagers assume people who are 35 are “old” and even past it, many people assume “what’s the point in having all that money by 60 or 65”.
Then when they get there, they regret not doing more when they were younger.
There is also a loss aversion attached to this. The idea that “what’s the point in having wealth. I might die tomorrow. I may as well spend everything that comes in”, is the same reason some people don’t invest even if they know that the chances of losing money long-term are tiny.
For such people, avoiding a statistically unlikely loss (dying young and not being able to spend money that has been accumulated or losing out even on a long-term investment) is more motivating than achieving a more likely gain.
What is the best financial advice for new companies?
It depends on several factors, including your industry. The biggest lessons I have seen, from observing failures, is:
- Stick to a business which is within your area of expertise. It isn’t about having a great idea. Ideas don’t pay bills. Execution does. People who have more experience in a domain are more likely to execute. The failure rate is far lower in such cases.
- Cashflow is king. If you as the owner know how to keep costs low, and revenues high, then you have a biggest. If not, you might fail, even with high revenues. One of biggest reason for failure is money running out.
- Be realistic about what is needed. “lack of market need” isn’t a real reason for business failure. That is a marketing or branding failure. There wasn’t a need for $5 Starbuck coffees 30 years ago.
- Be diversified across many different countries. Ideally, you should never depend on one local, or even national, economy. Some businesses have to, but if you are in services, try to be International. That way a recession or any other event in your home country won’t affect you as much
- Ideally, focus on recurrent/residual income, even more than upfront income, once you are established. If you always need loads of new customers to pay your bills, you are in a risky situation.
- Break industry norms. Why would somebody use a new company, if it is only doing what is normal elsewhere? You need to be a lot better than the competition or stand out. Everybody looks at the purple cow in the field, but never the black and white one, as Seth Godwin said. In a busy and competitive world, you can’t just focus on outworking or outspending others.
7. Focus on your strengths and delegate stuff which are your weakness. However, ideally the owner should be excellent at key, core, tasks. Some of the best businesses I know have 2 owners. One focuses on accounting and finances (money coming out) and one leads the sales team (money coming in). If your business is reliant on others completely for these tasks, it increases risks a lot. You are dependent on others completely for cashflow.
8. Never be complacent once you get success. Push on to the next level.
9. Don’t try to be all things to all people. Gary Vee is worth hundreds of millions. He leaves some money on the table sometimes as brands don’t like his colourful language. it doesn’t matter. There are plenty of people who like him. Don’t try to be all things to all people, and be in the middle of the road. That is the same reason that some niche businesses can do very well. You only need to be popular amongst a small percentage of people to succeed.
10. Be authentic, which is related to point 9.
11. An owner should always limit “ruin risks”. Most people are reactive and never ask themselves the hard questions like “what would happen to my airport restaurant business if there was another 9/11”? What would happen if there is another lockdown? Most bar, restaurant and entertainment businesses reacted to these events. They didn’t try to guard against these black swan events.
12. An owner should ideally have private investments as well as a business.
If you want to be rich, spend your time buying assets. Why does it become true?
If you don’t buy assets, your only income source is your ability to sell your labour (a job) or work for yourself (a business).
That ability to earn an income could be taken away any day because of:
- Bad health
- A terrible economy
- Your sector performing badly and you need to retain
- Your sector is being outsourced internationally
- Any other unforeseen circumstances
That is unless you marry into wealth or get an inheritance, which isn’t something to aim for or rely on.
So, even if you just save money rather than buy assets, that money will swindle over time if you lose your ability to earn money from your work.
Assets can give you cashflow to guard against this situation. Assets do come in many shapes and sizes now.
They can include
- Sometimes cash equivalents like t-bills, but this is less relevant these days.
- Digital assets. Therefore, you could be achieving cashflow due to something like affiliate marketing or royalties from writing a book.
- Company assets which are recurrent streams of revenue and would remain, or partially remain, if you got sick.
Moreover, we are living in a capitalistic system, even though markets aren’t exactly completely free.
The clue is in the word – capital. Even “anti-capitalists”, like the economist below, have admitted that it is rational to accumulate capital:
The theory of Piketty’s book is simple. Historically, labour costs have risen by inflation +2%.
Some years it is negative, and sometimes it is much higher than that, in a booming economy. But 2% is the average.
Real estate, adjusted for costs, has produced 3%-4% on average. Of course some places have done much better and others worse.
Stocks have done inflation +4%-5%, and +6.5%-6.7% in some markets like the US.
People who run successful businesses might achieve more than that, in return for higher risk.
So owners of capital will experience more fluctuations and volatility over time, but the long-term average will likely be better than just relying on labour alone.
Is the stock market a zero-sum game? Do people lose as much as others win?
It depends. It isn’t a zero sum game if people buy the indexes. 100% of the people that have bought the S&P500 for their whole lives, or most other major indexes, have won.
If I buy the S&P500 today, and you do too, we will both either win or lose together. My gains don’t affect your gains.
Moreover, as more people buy stocks, the businesses themselves have more underlying capital to invest. That is why many firms IPO in the first place.
With that being said, some people do engage in zero sum activities. Traders and speculators in particular.
Amazon can’t beat the S&P500 at the same time as it loses to it. Amazon also can’t beat Apple, at the same time as it loses to it.
Therefore, if you sell Amazon stocks today and buy Apple, then both sides can’t win from the trade.
Amazon and Apple could both go up against the market, and they could both make money, but they both can’t go up against each other. They can match each other’s returns at best.
In this example, one person won’t win as much as the other person loses, but it is still not a game where everybody will win equally.
One person, moreover, was foolish to trade in this situation, whilst the other person made a good choice.
That is one reason why the more you trade, the more likely you are to lose, due to compound probability and other reasons.
That is why some of the smartest investors in the world either buy and hold the indexes, or at least hold onto individual positions for ages, only selling to rebalance.
With that being said, stock trading, although statistically unlikely to beat the market long-term, isn’t quite as zero sum as currency trading.
Stocks as an asset class increase in value over time, even though not every stock will do.
With currency trading, the asset class (currency) doesn’t go up. The Euro can’t go up against the USD at the same time as the USD goes up against the Euros.
The biggest reasons why the average investor loses substantially to the market is too much buying and selling of individual shares, and panic buying when markets dip.
It is the biggest reason for results like these:
So, the ironic thing is, slow and steady can win the race in investing. Most assume that the more risk you take increases your chances of getting rich quickly investing.
Sometimes you are just taking more risk, plain and simple, with little chance of an upside.