To err is human. To err financially is not only human, it happens to even the most astute. Here is a list of the biggest financial mistakes. 6) Retirement Annuities
I hate annuities. Ken Fisher Retirement annuities are horrible investments. The only beneficiary is the annuities salesman. According to billionaire investor Ken Fischer, if you invest $1 million in an annuity you will put a kid through private college. The problem is that it is not your kid. It is the kid of the annuity’s salesman. Fisher says you would be better off cutting a check directly to the salesperson and then investing the balance directly in stocks and bonds. Do not be fooled by the sales rhetoric. Annuity salespeople will regale you with the tax benefits, the power of compounded growth, the discipline of saving (a lie that we have debunked), supporting your dependents, and long-term stability. If you are financially educated and disciplined, you can do better with direct investments. Annuities are black-box investments – there is no transparency and accountability of results. The fees are bordering on criminal. Moreover, when you retire with that annuity, you will get a stream of income akin to a quaint Scottish brook. You deserve the whitewater rapids on the Zambezi River.
7) Being Afraid of Risk
Risk is an interesting animal. You can take her out, buy her flowers, and even marry her. The only thing you cannot do is eliminate her. Risk, like Keith Richards' liver, cannot be eliminated. It can only be transferred and managed. Insurance policies do not eliminate risk. They transfer it to professionals who embrace it, manage it, and monetize it.
Warren Buffett built his fortune on risk. Take a look at the Berkshire Hathaway website (www.berkshirehathaway.com). The company spared no expense in the design of this eighth wonder of the modern world. Click on "Links to Berkshire Subsidiary Companies". Numerous Berkshire subsidiaries are insurance or reinsurance companies. They retail and wholesale risk. Risk is their most important commodity. Without risk, there can be no return. The eternal pursuit of risk avoidance will lead to "a life of quiet desperation and death with your song inside you" (Thoreau).
In 2016, David Rubenstein interviewed the Chief Executive Officer of Goldman Sachs, Lloyd Blankfein. Rubenstein asked Blankfein a question that, at first, seemed dumb. It turned out to be brilliant. He asked: “Lloyd, what is your job?” One would expect the following answer: “Well, Dave, my job is to make strategic decisions about the bank's products, customers, employees, stockholders, and goals”. Instead, he said his job was risk management. That reply blew me away. The job of the CEO of the world's most powerful and influential investment bank was risk management – not risk transfer or elimination, but management. Risk and return go hand in hand. If you want more return, you need more risk.
Jeff Bezos of Amazon became the world's wealthiest person in 2018 by taking risks. He put all his eggs in one basket. He went all-in on a little company that sold books over the internet. He grew it to a $1 trillion valuation. On Sept 4th, 2018, Amazon became the second company after Apple to reach a $1 trillion market capitalization. Risk is good as long as it is managed. Bezos made a calculated bet. He knew he could convert Amazon into the world's leading e-commerce site and the world's leader in cloud computing. Now he is working on making Amazon the world's leading online grocery store (through the purchase of Whole Foods) and the world's leading streaming service (competing with Netflix). Client satisfaction is his obsession. Amazon’s mission is to optimize the customer experience. Bezos suggests you "should start with the customer and work backward". Most companies do the opposite – they start with the product or service and then work towards the customer. In every Amazon internal meeting, there is the rule of one empty chair. If there are five Amazonians in the meeting, there needs to be six chairs. Whom/who does this chair represent? It represents the customer. Bezos does not want decisions to be made without taking the customer into account. If you start a business, and you believe in the business with all your heart, mind, and soul, go all in. Commit to it and believe you will succeed. This belief, commitment, and drive will act as a risk management tool.
8) Avoiding the Stock Market
The stock market is one of the greatest generators of wealth on the face of the earth. Having said this, many people avoid the stock market for two reasons. Firstly, they think it is too dangerous. Most people are terrified of the stock market because it exhibits wild and volatile swings and this is true – in the short term. The stock market, over the longer term, tends to be more predictable and benign. Your first step is to recalibrate your opinion of the stock market and take a long-term view. Secondly, they are under the misconception that you need to very super smart and dedicated to investing. In reality, you do not need to be an expert in stocks to become financially free – a basic understanding will suffice. This is what you need to know. A stock market is a place where you can invest in thousands of public companies.
Sure, it helps if you are prepared to spend the time to analyze individual companies, but the majority of people do not have the time, interest, or inclination to do so. For these investors, their investment vehicle of choice is known as an ETF or exchange-traded fund. An exchange-traded fund is a fund of shares that trade on the stock market like a single share. So instead of buying a share in Amazon, you can buy a share in an ETF that invests in technology companies. In this way, you will be investing in Amazon, but also in companies like Microsoft, Apple, Tesla, Google, Facebook, Tesla, and Nvidia. I am talking about the Invesco QQQ ETF. So, this is what you do – you apply a common-sense approach to investing. I walk you through the mechanics. I will profile three different types of investors based on their level of interest in the stock market.
Investor 1: No Interest
Let us assume you have no interest in finance, business, or investing. This is not a death blow to financial freedom. You will want to invest in a broad country or global ETF. The most globally diversified ETF is iShares MSCI World ETF and trades under the ticker symbol URTH (Jargon buster: A ticker symbol or stock symbol is an abbreviation used to uniquely identify publicly traded shares of a particular stock on a particular stock market. A stock symbol may consist of letters, numbers, or a combination of both. "Ticker symbol" refers to the symbols that were printed on the ticker tape of a ticker tape machine). URTH will exposure you to a broad range of developed market companies around the world. It provides access to the developed world in a single fund. If you had invested $100 every month into this ETF when it was first launched in 2012, your investment would be worth a little under $15,000 today (June 2020).
Investor 2: A Little Interest
Here I assume that you have a marginal interest in finance and the stock market. You know that CNBC is a business news channel and not a recreational drug, you have heard of the Dow Jones Industrial Average and you know that the FTSE 100 is the benchmark index of the London Stock Exchange and not a pesticide. You would invest in a more specific ETF. Instead of buying the whole world, you would refine your investment in a specific region or country. For example, you may be a fan of Taiwan. You traveled there a couple of years ago and was impressed by their bustling economy and you want to participate in the fortunes of Taiwanese companies. You could invest in the iShares MSCI Taiwan ETF (ticker symbol EWT) that trades on the New York Stock Exchange. Another great feature of ETFs is that most of them trade on US stock markets. In the case of Taiwan, there is no need for you to open a brokerage account in Taiwan – you can participate in the fortunes of Taiwanese business from the comfort of your own home (provided you have a US brokerage account). Over the past 10 years, $100 invested every month in this ETF would now (June 2020) be worth almost $19,000.
Investor 3: Above Average Interest
You have a real interest in investing as a hobby. You are curious about financial trends that are shaping the world. You are an avid reader of financial blogs and if you were waiting for your dentist appointment, you would rather thumb through a copy of The Economist than Men’s Health. Your interest does not go so far as to take you into analyzing specific shares, but you are interested in trends – such as clean and renewable energy, the rise of China as a global economic power, the sharing economy, fintech and cryptocurrencies, the future of health and wellness, robotics and artificial intelligence, driverless cars, cybersecurity, etc. ETF issuers such as iShares are aware of the rising interest in global trend investing and have started to launch ETFs to tap into this market. Take for example the iShares Exponential Technologies ETF (ticker symbol XT). This ETF seeks to track the investment results of an index composed of developed and emerging market companies that create or use exponential technologies. The ETF wants to access global companies with significant exposure to exponential technologies, which displace older technologies, create new markets, and have the potential to create significant positive economic benefits. As of June 2020, the ETFs biggest holdings were in the following companies: TESLA, ADYEN, SQUARE, ADVANCED MICRO DEVICES MERCADOLIBRE, NVIDIA CORP, PAYPAL HOLDINGS, WUXI BIOLOGICS, AMAZON, and MEDIATEK. A monthly investment of $100 in this ETF would currently (to June 2020) be worth almost $8,500.
9) Making Your House Your Most Important Asset The American dream is built on homeownership. The 2008 financial crisis was rooted in the 1990s. In 1995, Bill Clinton took time off from using Monica Lewinsky as a human humidor. He rewrote the Community Reinvestment Act. This pressurized banks to lend to low-income neighborhoods and facilitated the rapid increase in subprime lending. Clinton did this to strengthen his political base in those lower-income households. He made it easier for these families to attain the American dream and thereby increased the probability of reelection in 1996. Bill is a cunning fox. Homeownership enslaves people financially.
According to Zillow, one-third of homes in the United States in 2018 were "free and clear" - they were not encumbered by a mortgage loan. Two-thirds were encumbered. There is nothing like a 30-year mortgage bond to tie you down financially. If you have a mortgage and a job, the pressure to stay in that job until that death pledge has been paid off is immense. Mortgages are the single biggest reason standing in the way of financial freedom. To make matters worse, most people believe their home is an asset. Robert Kiyosaki, in his book "Rich Dad, Poor Dad", says the asset/liability test is simple. Assets put money in your pocket. Liabilities take money out of your pocket. If you are living in a house, and it is mortgaged, you are paying rates, taxes, and interest on the loan. It is a liability. If it is "free and clear" it is still a liability. You are paying rates and taxes, not to mention lights, water, and general maintenance. But property prices always go up. That is a fallacy. Americans who bought houses before the financial crisis of 2008 will paint you a different picture. Real estate is like any asset – its price can rise or fall. If you are banking on your house price appreciating in value, then welcome to the world of speculation. Real estate is a very powerful income-generating asset, but it is only an asset when it puts money in your pocket.
10) Lack of Patience Impatience (noun) - the tendency to be impatient; irritability or restlessness. What causes impatience? Impatience is triggered when we have a goal and realize it's going to cost us more than we thought to reach it. Impatience is the single biggest obstacle to financial freedom. We are living in an age of instant gratification, same-day delivery, and super high-speed internet. We complain about being forced to wait for 40 minutes for takeoff on a transatlantic flight. We have lost sight of the fact that modern-day air technology allows us to travel from New York to London in 6 hours. In the old days, it took weeks by boat and there was always the chance that if you did not die of scurvy, you were attacked by pirates or crashed into icebergs.
I Googled “long term stock investing” and came up with 269 million results. I then Googled “stock trading” and came up with 4 billion results. Why is it that trading yields 1,400 percent more results than investing? This is no surprise because trading is sexier than investing. The objective is the extraction of short-term profits. Day trading or scalping has taken off over the past ten years. To answer this question, you need to answer the following: when it comes to money management, do you want sexy or do you want boring? Do you want Marilyn Monroe in the Seven Year Itch or Fred the accountant? In a perfect world, you want your chef to be French, your sports car to be Italian, the driver in the lane next to be non-Italian, your watch to be Swiss and your policeman to be British.
What about money management? There is a great quote from Paul Samuelson. Investing should be more like watching paint dry or grass grow. If you want excitement, take $800 and go to Las Vegas. This is not to say that you should invest in the money market, but I would suggest that there is greater merit in investing in long term, stable, and boring companies that are growing predictably than looking for short term wild swings. Mark Twain had the following to say about speculation: “OCTOBER: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February. There are two times in a man's life when he should not speculate: when he can't afford it and when he can.”
Now for the facts. Two of the greatest long-term investors are Warren Buffett and the Swiss-Brazilian, Jorge Paulo Lemann. Both men made their fortunes making long-term bets on companies like Coca-Cola, American Express, Kraft Heinz, Bank of America, and Anheuser Busch. As at the beginning of November 2019, according to the Bloomberg billionaire’s index, Buffett was the 4th wealthiest man in the world with a net worth of $86 billion, and Lemann was 43rd with a net worth of $22.5 billion.
We now move across to the hedge fund billionaires. Hedge funds are unconstrained funds that tend to have shorter time frames and therefore are more often associated with trading. According to Bloomberg, the richest hedge fund manager as of November 2019 was James Simons, the founder of Renaissance Technologies that has $61 billion in assets under management. The fund has delivered annual returns of 40 percent since 1988 and has paid him more than $9.5 billion in cash distributions since 2006. Second on the list is Ray Dalio, the founder, and co-chief investment officer of Bridgewater Associates, a hedge fund firm that manages $160 billion in assets. Simons was worth $20.7 billion and Dali $16.6 billion and were ranked a lowly 49th and 75th respectively. So, let's do some averaging. The average wealth of the top two investors is $54 billion while the average wealth of the top two traders is $18.6 billion. The universe is clearly saying to us that long term investing is more profitable.
This is a random exercise but let me tell you one thing for sure – it is easier to replicate the strategies of Buffett and Lemann than the strategies of Simons and Dalio. Financial freedom is achieved by making small incremental changes. If you set the goal of doubling your income in six months, I think there is a high probability that you will fail – unless you become a drug dealer or a YouTube influencer. Your objective should be to make small, incremental, and consistent changes to your spending patterns. Dramatic and radical changes seldom work over a long time when it comes to financing. It is the same as crash diets – you may succeed it dropping a bunch of pounds in the first few weeks, but after a couple of months, you have added those pounds and then some. You should compare your finances today with how they were yesterday and focus on small incremental changes. Set numerous small achievable goals. A fraction of a percent changed every day, compounded over many months and years will yield outstanding results. Compounding is the key to financial freedom. If you are still not convinced, let me close off with a quote from the great Warren Buffett: “The stock market is a device for transferring money from the impatient to the patient."
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