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At age 3, success is not peeing in your pants.
At age 16, success is “gettin’ a little”.
At age 25, success is graduation and a wedding.
At age 35, success is about career and family.
At age 55, success is about graduations and weddings.
At age 70, success is “gettin’ a little”.
At age 90, success is not peeing in your pants.
Note: This is the first post of 14 consecutive posts from 2nd to 15th of April about how to get rich. Check back daily or subscribe to the RSS feed
There probably isn’t a person in the world that does not want to be financially free. The idea that one day you have enough money to do whatever you want thrills everyone from children to grown ups.
But as we all know - some of us make it rich and some of as don’t.
The laws of success are universal and by following them carefully it is possible for anyone to get rich.
Today I am going to talk about the most important rule on getting rich:
This is the single most important and also most overlooked principle on how to get rich. The concept of “pay yourself first” is so easy that even a 3 year old can understand it but few of us are actually using it.Most people think that getting rich can’t be as simple as paying themselves first and tend to skip this step.
BIG MISTAKE! Not following this principle automatically reduces your chances of getting(and staying) rich by 90%. In fact I would go as far as to say that if you are not willing to start following this principle there is no point in reading this post any further - you will not get rich. Go back to work!
What does it mean “pay yourself first”?
Each and every time you get paid, immediately take a portion of your money and set it aside - you can not spend this money. This is the money that is going to make you rich. You can simply save this money on your bank account or better yet - invest it wisely.
This money is going to generate interest and grow your investments. The compounding interest from your money will eventually be more than the money that you have set aside. Albert Einstein didn’t say “The most powerful force in the universe is compound interest” without a reason.
Remember: It is important that immediately after getting paid you should put aside an amount of money that you have predetermined. It is of the utmost importance that you do this before paying any bills, shopping or spending some of the money on something else. Whenever people decide to start saving money they will usually pay for all their bills first and then live as frugal as they can only to discover that they have spent all their money and there is nothing to set aside. It doesn’t work this way!
The natural law of money says that our spending habits will expand until we spend everything available. For example if you have 1000 dollars until the end of the month you will spend it all by exactly the end of the month. If you put aside 500 dollars from your paycheck immediately after receiving it you will have only 500 dollars left until the end of the month but this will almost always be enough. In fact depending on the amount of money you set aside you might not feel any difference. The only difference will be that in the end of the month you have some money set aside that otherwise wouldn’t be there.
By paying yourself first immediately after getting your paycheck you will make sure that you will stick to your plan of collecting money - Always sticking to the plan is the best way of realizing your goals and getting rich.
The government also uses the pay yourself first principle in order to secure the money that they have already budgeted for.
Have you ever thought why does the government take taxes from your paycheck before you get paid?
They are simply making sure that they will get their share of the money. If you would have to pay your taxes in full at the end of the month with the money you have left from your paycheck there would be awfully lot of people who would not be able to pay. If the government uses the pay yourself first principle why shouldn’t you?
The easiest way to start paying yourself first is to open a separate account where you can deposit your predetermined amount of money from your paychecks. It is also a good idea to make sure that it is not easy to spend this money.
If you are using online banking it might be possible to set it up so that the transfer to another account is made automatically after receiving the paycheck. If you can do this it is highly recommended. For example my online bank is set up to transfer a predetermined amount of money every month to an account with a brokerage firm. It saves me the hassle of doing it myself and ensures that I follow the pay yourself first principle of getting rich.
Always remember that part of your money belongs to yourself
If you spend all your money by the end of the month it means that all of it belongs to someone else. What’s the point of working for money when it does not belong to you?
The reason that you are already not rich is probably because you do not follow this principle. You might know it, but that’s not enough. In order for it to work you have to use it!
Check back tomorrow for the second most important principle of getting rich.
A young man wanted to know how to be successful.
He was sent to a wiseman who made him promise to follow his instructions very carefully.
He agreed and the wiseman took him to a river. The wiseman asked him to kneel down in the water and submerge his head. Once under the water, the wiseman grabbed his head so he couldn’t come up for a breath. After the young man failed and fought for a minute, the wiseman released him, threw him up on the bank, and started walking away.
“You crazy old man!! How did THAT teach me how to be successful?!”
The wiseman turned and said,
“You will be successful if you want something as bad as you wanted that breath of air”
Risk comes from not knowing what you are doing
Warren Buffett
The average investment advisor’s recommended portfolio will vary depending on his client’s “appetite for risk”. If the client wants to avoid risk he will be offered a well-diversified portfolio of “safe” stocks and bonds that theoretically won’t lose money - or make much, either.
If a client is willing to take risks he is probably advised to invest in so-called growth stocks which all have great promise but no guarantees.
This idea makes sense to the advisor and the client who both believe it’s impossible to make above-average profits without exposing yourself to the risk of loss.
But this is not the case.
A great investor understands that risk is contextual, measurable and manageable or even avoidable.
What is risky for me might not be risky for you
Is the experienced rock climber, whose fingers are the only things holding him a hundred feet up a vertical cliff taking a risk?
Or is the expert skier who zooms down the almost vertical double black diamond slope at sixty miles an hour taking a risk?
You would probably answer “Yes!” But what you actually mean is “Yes, if it was me doing it”.
Risk is related to knowledge, understanding, experience and competence. Risk is contextual.
While we can’t be sure that the rock climber or the skier are taking no risk we intuitively understand that they are taking less risk than we would in the same situation.
Even when we observe something that feels very high risk we can assume that for somebody else it might not be risky at all.
To even better understand the concept, think about driving a car. Chances are that you are an experienced driver and you have the ability to make instant judgments while driving - You can even listen to the radio and switch lanes at the same time.
When you first started driving it was not as easy as it is now. When switching a lane you actually have to consider several things:
Is my speed OK compared to the speed of the other cars to switch lanes?
What’s the speed of the cars in front and behind me?
Will the drivers in the other lane let me in?
…and so on.
The more you practice driving the better you get at it - to the point that you will be able to do it unconsciously leaving your conscious mind to be able to listen to the radio.
The more you practice something the better you get at it - until at one point it becomes a habit where you do what you do unconsciously.
This is the case with the death defying rock climber and the skier but it is also the case with professional investors.
There is a story of George Soros interrupting a meeting to place orders worth hundreds of millions of dollars. A person who was attending the meeting told later:
“I would shake in my boots, I wouldn’t sleep. He was playing with such high stakes. You had to have nerves of steel for that”
For this person it looked like George Soros was taking a huge risk but in fact he didn’t. In order to be able to make fast decisions concerning hundreds of millions of dollars like this we would have to know what Soros knows and it would not look like such a huge risk any more. We would simply have to learn to drive the “trading car” as well as George Soros is doing it.
Remember:
Risk declines with experience
How can we embrace risk as a winning investment habit?
Restrict your investments to the areas of life where you can make competent decisions. If you don’t know anything about computer chip makers don’t invest in them even if a stock has an attractive price. If you know about construction find a company that does just that. It will be so much easier for you to understand what they are doing.
Warren Buffett:
It’s not risky to buy securities at a fraction of what they are worth.
The ideas from this post are derived from the book „The Winning Investment Habits of Warren Buffet & George Soros”.
They are very often wiped out!
Here’s an example about two companies:
|
|
Long-Term Capital Management |
Victor Niederhoffer |
|
Time to make the money |
4 years |
20 years |
|
Amount of money made |
5 billion dollars |
130 million dollars |
|
Beginning of collapse |
April 1998 |
October 27, 1997 |
|
End of collapse |
October 1998 |
October 27, 1997 |
|
Amount lost |
4.6 billion dollars |
130 million |
|
Amount left |
$400 million |
Nothing |
Long-Term Capital Management (LTCM) was a hedge fund founded in 1994 by John Meriwether who was a former vice-chairman and head of bond trading at Salomon Brothers.
Long-Term Capital Management had developed complex mathematical models to take advantage of arbitrage opportunities on the bond market. Because of the enormous profit they made on the first years they had more money to invest than they knew how to invest. In other words they had too much money to use with their successful model. Because of the pressure to keep making the amount of money they did in the first years they took very risky positions outside their know-how and burned badly.
Victor Niederhoffer is a well known fund manager and a professor of finance in University of Berkley (1967-1972). After having an average annual return of 35% Victor Niederhoffer had made so much money that he gave most of it back to the investors but he took the 130 million dollars and invested it in Thai bank stocks after they had fallen heavily because of the Asian financial crisis. On October 27, 1997, losses resulting from this investment, combined with a 554 point (7.2%) single day decline in the Dow Jones Industrial Average (the second largest point decline to date in index history) forced Niederhoffer Investments to close its doors.
That’s what happens to companies who don’t make preservation of capital their primary aim - they lose their money.
The ideas from this post are derived from the book „The Winning Investment Habits of Warren Buffet & George Soros”.
Excellent investors always take responsibility for their results.
When a good investor takes a loss he doesn’t say „The market was against me” or „My stock broker gave me bad advice”.
After a mistake an excellent investor always admits „I made a mistake”.
A winning investor accepts the result without recrimination and always analyses what they did or didn’t do so that they won’t repeat the mistake.
A true investor acknowledges that the best lessons are always the ones that you get from your own mistakes.
By taking responsibility for your actions – both profits and losses - a good investor stays in command of himself.
It’s exactly like the expert surfer dude hitting the waves. He doesn’t believe that he controls the waves but because of his experience he knows when to ride a wave and when to avoid it. He is in control of his own actions. If he falls – it’s his fault.
Below is a short video about the things that make us successful in life. The presenter is Richard St. John who made his observations based on over 500 interviews with successful people.
Here is a short review about the video.
Here are the 8 common things that help us be successful.
1. Passion
Do it for love not for the money. The money will always follow when you truly enjoy what you are doing.
2. Work
It’s all hard work. Nothing comes easily. But remember to have fun.
3. Good
Put yourself into something and get damn good at it.
Practice makes perfect.
4. Focus
It all has to do with focusing yourself on one thing
5. Push
Push yourself. Physically, mentally. You have to push, push, push and push
6. Serve
Serve others something of value - that’s how people really get rich.
7. Ideas
Have ideas and make them come true.
Listen, Observe, Be Curious, Ask Questions, Solve Problems, Make Connections - Ideas will follow.
8. Persist
Persistence is the number one reason that successful people are successful.
Here’s the video
Once upon a time there was an entrepreneur who understood how important it is to educate himself in order to stay competitive.
He set himself a goal that he will take 10% of what he makes and spend it on seminars and educating himself.
When we lose money, we count the dollars we actually lost. Not Warren Buffet. His loss is what those dollars could have been. For him losing money is a gross violation of his underlying aim, which is to “watch money grow”.
Preservation of capital is an investment rule propounded by many but practiced by few.
When asking investors how it would feel to make preservation of capital, most report a sense of paralysis or a feeling that you can’t do anything because you might lose your money.
Here is a graph how most investors think about investing and risks. The conventional thinking goes like this – in order to make a 1000 dollars I need to risk to lose the 1000 dollars I already have.
Here is another graph showing the thinking behind the best investors of the world.
There are a couple of reason why the graph for the best investors in the world looks a lot better to anyone even remotely acquainted with the principles of risk versus potential profit. The second graph illustrates a proportionally smaller amount of risk with better profit.
Here is why the second graph is the right way to think about risk and reward.
1) While investing money the most you can lose is all of it but the most you can win is unlimited. If you bought the stock of Microsoft in the early 80’s you would have made more than 100 times the money you put in on your investment.
2) The second reason for this graph to look like it does is even more important. Because of the compound interest every dollar that you make on your investmet further increases the amount that you are going to make. For instance if you manage to buy a stock with a dividend yield of 10% then after the first year your 100 dollars would be 110, after the second year 121, after the third year 133,1 and so on. As you can see the first year you made 10 dollars, the second year 11 dollars and on the third year 12 dollars and 10 cents. When you have a stock that keeps rising 10% a year that doesn’t pay any dividends it is essentially the same thing – the first year your stock price will rise 10 dollars, the second year 11 dollars and the third year 12 dollars and 10 cents.
The investors that consider the second graph to tell the truth are more often focused on the investment process. They don’t view each investment to be a discrete, individual event because they know that even if you only invest for a relatively short term and make 10 per cent on your investment – it will give you 10% more to invest the next time.
Thanks to the compound interest you will potentially make more money with every passing year. Thus the longer your investment period the lower is the risk to lose all your money compared to what you can make.
The ideas from this post are derived from the book „The Winning Investment Habits of Warren Buffet & George Soros”.
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