Money is what you see. Wealth is what you accrue over time. Epic and legends are created just to tell how good or bad wealth can become. Let me take you on a journey to show why it is hard and what separates the wealthy.
Last year I had the privilege to talk to a lot of smart clients. And they shared their personal stories and approaches to solving the creation of wealth. It is an amazing experience. But there is just one problem. 80% of what we think we know about how money works correlates to 0.00001% of actually what happens in reality. This is a difficult number to get our heads around. Think it this way - who would know about cricket better? Me or Sachin. Why? Because he would have faced 10,000 balls for every ball that I would have faced. This is what happens in money as well. We all are playing against many Sachin's - who would come on top?
This brings me to Warren Buffet. You should know that he made 81.4 billion of his total 84 billion after the age of 65. That confounds us. We can never wrap our heads around this as well. We can attribute and demonstrate the confounding phenomenon to 2 factors. Never lose money and improve the effectiveness of your savings rate. And remember Warren Buffet had 50 years of experience before he reached 65. That is 2 Sachin Tendulkar's lifetime of experience.
That brings me to the next question that you are thinking about. Didn't Warren Buffet was lucky and took his risk. Yes he was lucky in the sense he never bets on heads (+ve return); he bets only on tails (no -ve returns). There you have his first rule - Never lose your money. He defined his luck. What about risk? According to him, he avoids all risks. This is a worthy second rule of him. Never expose your money for heads (+ve return). Expose your money for tails (no -ve returns). The risk he takes is he does not want to be rich when everyone is rich. He does not want to be poor when everyone is poor (-ve returns). That very well squares with the definition of Nepolean - "Genious is one who does average thing when everyone around him loses his mind one way or the other". There you have his third rule: Average beats all extremes. That is how he defined his risk - Avoid all risks.
Well, what is it worth - you ask? Well, it avoids surprise and gives freedom. What does surprise mean? Surprise is the other side of luck. We all bet on surprise - what if the market goes up? (to get +ve return). Let us assume someone promised they can beat any returns by 0.01%, what it intuitively translates to is - he has to know some information that 99.9% of people do not know. It is like betting that Sachin is going to hit a sixer in a given match; he might, but how likely, you have to calculate. Surprise is what keeps games alive. In money, you have to avoid all surprises and define your luck. This gives you enough freedom to your money and enough dividend in terms of the control of your time. This is the best ROI your money can give it to you. This will unplug you from wall-street. You can use that energy to do what matters most for you and your family. (By the way, Americans are the most stressed people in the world. Wall-street, their boss and their family in that order)
What should be the fourth rule? Give yourself enough room for error. History is littered with examples where a good idea taken too far becomes indistinguishable from a bad idea. And it really hard to distinguish a good idea from a bad idea when ideas pan out in few years down the line. When trying to forecast we can either overestimate or underestimate various outcomes. Neither of them will be true. In money, managing the margin of error is the smart thing to do and allow reality to take shape in many years down the line. This margin of safety should allow you to compensate for your risk. Your individual pessimism is a good tool to use to measure your margin of error.
Having laid out the four rules, there are few psychological barriers that you have to overcome. Nothing in the market is free. You either pay cost or price. If you are good with numbers you have a better chance of calculating the cost, if not you have to pay the price. Price is always more than the cost. This trap is hard to overcome. The next barrier you have to overcome is you need to have a plan for the plan. Anything you plan in the future is going to change. There is one barrier even Warren Buffet could not overcome. In any financial decisions, you will be torn between rational and reasonable arguments. This is one of the hardest things to overcome. Paradoxically, in investing, money is neither rational nor reasonable; it just tosses and turns against every constraint that is possible, what comes out of it is all there is. It is yours to make the best out of it. One way this shows up in personal finance is we postpone all our financial decisions. You can postpone, at what cost is something you should seriously ponder.