Expand Your Understanding of the Investment Possibilities that Exist
Most people in the western world have an overly narrow view when it comes to investing - they usually think one of those places for storing money:
Even the above list is broad - most young people today don't readily buy bonds or invest in bond funds (even though the overall bond market is bigger than the equities market). Unless you're lucky enough to have had your grandma buy you a bond, you've probably never owned one and you might not even really know how one works.
So, that leaves us with equities or cash - is there nothing else? Of course, there is something else -- most people have been doing other things with capital rather than buying equities or saving cash -- throughout history. You just have to open your eyes to the broader investing and capital allocation universe that's out here.
Of course, you shouldn't be foolish - equities (eg. stocks, mutual fund, and ETFs) and cash are better understood and offer a lot of advantages. But a person can also invest in:
getting even deeper and more complex, you can invest in things aren't aren't even assets but things that might bring a return later on. These might include:
Again, no one here is saying that you should forget the bread and butter that cash and equities offer the broad swath of the investing public - far and away these should (for most people and in most situations) make up the majority of your saving and wealth-boiling plan. However,r it's smart to lift your head up once in a while to see other possibilities and opportunities available if only to build a better and more comprehensive understanding of what capital allocation, investing, growth, return, and success really mean in your overall financial life.
The Importance of Failing at Investing - It's Almost a Prerequisite to a Successful Long-term Investing Track Record
Failure is always unpleasant but a part of life that can teach. Not all things require failure - you can be a great academic and never fail a class and you obviously don't' want to be an engineer or an architect that ever fails. However, with investing, it's a whole different game - failure early on is almost a prerequisite to a successful long-term investing track record. It's not only that failure is ok, it's almost that utter failure early on (or possibly later on, but early on is better because you usually will have less invested early on).
Financial Markets are too Difficult to Predict
This is a pretty bold statement we're making - we're saying that not only is failure ok but that failure in investing is almost a prerequisite for a good long-term investing track record. This is the case because investing -- unlike so many other professions and activities -- involves intense levels of uncertaintly and potentially chaos. The markets are uncertain and can act in chaotic ways. Additionally, when they are chaotic, they are of the more complicated second order chaos variety - this means that not only is it hard to predict financial markets but that in attempting to predict them we influence them as well. The problem is that humans have a lot of deep-seated heuristics and cognitive biases that intensely cloud our thinking and prevent us from acting in rational ways.
Cognitive Biases and Heuristics Can Lead an Investor Astray
An engineer or an actor or an architect or a college student or an academic doesn't need to fail because their professions are (1) far less uncertain in terms of predicting outcomes and (2) rely on things that are less affected by heuristics and cognitive biases. For example, a bridge builder uses principles of physics to predict the behavior of materials in various situations - not only does this prediction not involve deeply complex or chaotic systems, but it can also be tested in small-scale environments before being implemented (something that's not really possible in a world where time travel hasn't been invented yet). Here's a brief list of some heuristics and cognitive biases:
Two Main Benefits of Investment Failure
Failure in investing does one of two things (and maybe both):
A Real-Life Example of Investment Failure
As an example, I failed big time when I was about 20 years old. This was right before the Great Recession and my friend was working at Washington Mutual as a teller while going to school - the now defunct predominantly- Western bank that was purchased by Chase after it's collapse. We were young college students interested in entering the market and we had no inkling that the Great Recession might come. We bought a significant amount of WaMu stock. Then the economy tanked and the stock went down. We were pretty heavily invested in this one stock at the time. He went to his job every day and he told me no to worry - after all, how could a big bank like this with so much real estate and so much branding and so many customers collapse? It wasn't going to happen. Then, the bank failed and we lost our entire investment.
That experience taught me a lot about investing:
You can't save your way to riches if you don't have a big enough income to save just like you can't dig a big hole if your shovel is tiny. Too many people, too many financial websites, too many financial advisors, too many financial shows have for too long advocated saving with a deep lack of attention to the more important sid of the equation: INCOME.
Of course, even if you have an enormous income but still manage to spend it all, you won't build wealth. But that is not at all relevant to what we're discussing here. What we're saying is that there are simple mathematical and physical principles govern the world we live in and based on these principles there's something we know that's true:
the maximum amount you can save is your full income - this would be not possible in most cases it would require not spending anything
So, if you're earning $30,000 a year but are the most magnificent saver in the world, the most you can possibly save is $30,000 but realistically you'll be considered an ultra-saver if you manage to save $20,000 a year.
Contrast that $30,000 per year example with someone who earns $300,000 a year - clearly that individual has a much bigger shovel and has a lot more room to take advantage of saving. In effect, this person who makes $300,000 can benefit more from saving because the more he/she saves the more they can put away for building wealth up to their income. In effect, if they can spend $10,000 a year like the person in the $30,000 example, they can save a huge pile of money every year and build a lot of wealth.
People should be focused on saving, but they should equally (if not more intensely) be focused on generating more income for themselves os that they can put more money aside. This is easier said than done and that's the reason most financial resources tend to focus on saving rather than increasing income - everyone simply wants to pick the low-hanging fruit.
In Antiquity, Family and Community Provided a Safety Net in Retirement
Throughout most of human history, the idea of retirement as we know it today didn't exist. People simply worked their entire lives either hunting and gather or farming (after the Agricultural Revolution) -- if they were lucky enough to survive into adulthood -- and when they were too old to work, they relied on their families to take care of them. An old person might rely on younger siblings, children, and nieces and nephews within the family or community to take care of them. While doing this they probably still had to do some work - the idea of not working at all is a deeply modern notion and even very old people in ancient times still likely cared for children, did chores around the house, and performed other familial duties (eg. arranging marriages, representing the family to other communities, and advising younger family members).
Although life was incredibly harsh with humans having to face both natural disasters and man-made dangers in the form of banditry, war, pillaging, or abandonment, most human societies operated in a way where the elders and those who were unable to work were taken care of by family. As time moved forward and as humans settle down this was more and more true - while a hunter-gatherer tribe might leave an old person to die, a farming community would likely be able to provide for the elderly because life was calmer and a bit more stable in terms of movement and physical danger.
Obviously, no one in their right mind living in the first-world should want to go back to a hunting and gathering lifestyle and especially a farming lifestyle (as farming was likely worse than hunting and gathering for overall human well-being). However, we can't deny that the family bonds that existed in the past that effectively created an organic safety net for the elderly no longer exists today.
Safety Nets Such as Welfare Provide Retirement Security in a Changed World
As the world moved forward modernized, nations around the world began creating public, centralized welfare systems to take care of those who were too old to work and had to enter a stage of retirement or diminished income-earning capability. In the United States, during Roosevelt's New Deal during the Great Depression, the Social Security system was created - this was a system where old people who were no longer working could receive income from the government (meaning from those who were earning income). In effect, this wealth-transfer mechanism sought to replace the old traditional familial and community retirement safety nets that had long since been eroded over the centuries following the Industrial Revolution.
It is difficult to argue that a safety net for old people who can no longer produce income through their labor and who don't have a large enough retirement nest egg to live on is a prudent idea - it is deeply natural to humanity to take care of one another. The difference is that instead of taking care of each other locally, we started taking care of each other on a grand national scale. This creates its own problems and perverse incentives, but it fundamentally is in line with our human nature. If done in a prudent and conservative way (something that is far from guaranteed), such a retirement safety net can at once benefit the economy through stabilizing things and benefit society through creating a better and healthier moral landscape by taking care of retirees.
Retirement Saftey Nets in Jeopardy - Self-reliance is Key
However, today the Social Security system -- a system that hasn't even been around for a century -- seems to be in jeopardy (it is projected that in 2037 Social Security trust fund reserves will be exhausted and where 100% of payments will no longer be able to be made). A system designed at a time where there were few retirees living into their 60s and 70s compared to the working population is under stress in the world where Baby Boomers are aging rapidly with access to world-class health care that will allow them to live into their 80s and 90s reliably and in good numbers. Many believe this system will not be able to sustain itself. This will be further exacerbated if unemployment increases over the coming decades due tot he rise of artificial intelligence. Young people today should not rely on Social Security to be around when they are old and gray - that is now a foolish proposition.
For young people today, the idea of retirement is different than for almost all past generations. For the first time in history, neither (1) the familial/community structure that effectively provided retirement benefits for the old nor (2) the retirement benefits provided by welfare systems like Social Security is likely to be around when today's young men and women reach retirement age.
So, we're now in a world where the old family and community structure have long since been almost totally wiped out and where the retirement safety net that came in to replace that old structure is itself in peril. We are facing a troubling and dark world when it comes to retirement - we have neither one nor the other, we only have ourselves at this point. Although a fix might occur and things might turn out well, in the end, any prudent person who is under the age of 40 should discount Social Security and only rely on himself/herself to provide in old age and retirement. This requires changes - it requires a discipline that might not have existed in the last century for most of the population in term of saving. Young people must be diligent and disciplined savers and investors if they are going to be able to amass a nest egg large enough to support them through what could be decades of retirement.
This means that saving 5% or 6% in your 401k to get your employer match, putting $5000 a year into an Investment Retirement Account (IRA), or simply having a nice cash cushion in the bank is not even close to enough. Saving rates must far exceed 10% and should approach 25% if young people today are going to be able to comfortably retire. Additionally, effort and energy must be put in to invest the savings in a smart way - saving cash will not be sufficient as growth is going to be needed over time in order to build up a nest egg.
in darkness, I see a starkness
a starkness unlike the one I knew before
in gloom, I see a boom
a boom unlike the one I knew before
in pain, I see a gain
a gain unlike the one I knew before
in fierceness, I see a nearness
a nearness unlike the one I knew before
in animals, I see a spirit
a spirit unlike the one I knew before
a spirit not frail nor afraid of hail
the kind that does not fail and will set sail
on waters fierce or dumb
by Pennies and Pounds
Written on May 8, 2017, this poem is under copyright and is the intellectual property of the creator of the poem and this website. Express permission is required to reproduce or distribute it - please email us at firstname.lastname@example.org for such approval.
In a job you sell your time and your energy for money - you will never become rich this way because of the inherent restrictions the laws of nature and of physics place upon us all. Entrepreneurship (eg. business, ideation, innovation, etc.) has been one of the few consistent and reasonably moral paths to both moderate and extreme wealth since the industrial revolution.
Of course, other paths such as crime and political corruption have always existed as paths to wealth for those who were willing to walk on them, but we are only concerned with paths that really add value to humanity and can at least be somewhat considered morally permissible.
No matter how hard you work and no matter how many hours you work, you will be restricted to the number of hours in a day, in a week, in a month, and in a year. With a job, you are selling your time for money. Your time might be worth little or it might be extremely valuable given your human capital, but you still are selling this finite resource for money.
The richest people in your towns and cities are generally not people who have jobs. Yes, someone in your city might earn $100,000 per year or maybe $250,000 per year working as a highly-paid individuals in a big corporation, but there are also plumbers, electricians, small accountants, small lawyers, dentists, doctors, programmers/coders, restaurant owners, website owners, that earn $500,000 or $1 million (or much more) per year through their entrepreneurial ability to use their human capital in a way that is not restricted by time. In effect, these entrepreneurs are able to expand the audience for whom they create value both in time and in scope - they can reach people even when they are not working (eg. website) and they can reach many more people (possibly millions) all by themselves. In this process, the create value for a lot of people and they are themselves able to extract a portion of that value as remuneration from themselves without having to rely on an intermediary in the form of an employer.
An Absurd Example of a Great Job to Bring the Point Home
There are 8760 hours in one year. Let's say you work like a crazy person and are able to work for 1/2 of that time. This means you work for 4380 hours in a year.
That 4380, represents about 84 hours per week without taking a single week of vacation. Clearly, we have an unsustainable situation if the work you're doing is in any way physically or mentally rigorous.
So, you -- a total workaholic per the above -- are making how much money? Well, that depends on your hourly wage. According to the Bureau of Labor Statistics (BLS), the average private sector hourly wage in early 2017 is $26.19. But you're not an average person - you're making a lot more than average in our example.
According to the BLS, the highest mean hourly in the US is for anesthesiologists who make about $130 per hour - this is even higher than surgeons, lawyers, doctors, and chief executives. But even then, let's say you make even more than that.
Let's say you can make $500 per hour consistently for every one of your hours. This is a hard thing to do. Lots of people earn $500 per hour for ad-hoc work - think of a graphic designer who bills for two hours after spending two hours securing a client or a lawyer's billable hours that don't take into account time spent on client interaction or business management. Unlike most, you're able to get paid $500 per hour for your entire 84 working hours every single week of the year.
So, per the above example, you'll make $42,000 per week
This comes out to $2.18 million per year
Clearly $2 million is a very large amount of money to be earning per year, but think of the fact that even with our truly absurd example where you're working like a machine and earning an extremely high hourly wage, you will still only earn about $20 million in 10 years or $100 million in 50 years. Yes, those are a large amount of money, but they are literally nothing when compared to what some top people in business and entrepreneurship make more than $100 million in a single year. Facebook founder and CEO Mark Zuckerberg, for example, has a current net worth that would equate to earning $4 million EVERY DAY OF HIS LIFE!
Clearly, the gains Zuckerberg and other extremely rich individuals have earned are not based on income - it would be impossible to sell their time to earn such gains. Instead, they have earned money selling other things such-such as ideas that are not restricted the same way time is. The highest paid salaried people are always making less than the highest paid entrepreneurs because the world is created in such a way that time is restricted while ideas are not - with ideas you can be earning multiple streams of income every second of every day or you might have windfall gains by creating immense value for millions (or even billions of people). It's far more difficult to do this at a so-called job.
The key takeaway here isn't that it's bad to have a job. The key takeaway should be that you have to lift your head up from the current place you’re at and see things in a broader, holistic, and realistic way. By understanding the inherent restriction, a job places on your ability to earn you might be better able to spot opportunities or even better understand the world.
Entrepreneurship isn't for everyone - many people will do better at a good job in a good firm. Additionally, although the above discussion was about money, money is not the most important thing in work and shouldn't even be the reason anyone forgoes a job to start a business on their own. There must be something else besides money motivating you if you are to have a chance at being successful in any endeavor.
The only thing we're trying to portray here is that business and entrepreneurship allows you to escape from the paradigm of selling your time for money - you can escape this paradigm and go beyond the limitations of time and space on value creation that a job places on you.
Caveats and Exceptions - There are Some Jobs That Will Make You Rich
As with almost anything that's generally true, there are some caveats and exceptions. Here, the main caveat is that there are in fact a handful of people in the world who do become truly wealthy through their jobs. These people include the likes of:
Additionally, one might argue that in the above absurd example it was unfair to bring in the likes of Mark Zuckerberg - there are plenty of entrepreneurs who earn less and even more who fail and don't earn much at all. This is all true, but the point did do a comparison of high paid jobs vs highly paid entrepreneurs. In that comparison what we attempted to illustrate this that in entrepreneurship there is inherently little restrictions on earnings - earnings can be so great that they become absurd (eg. $4 million a day for every day of Zuckerberg's life) while job earnings are restricted simply by the laws of nature and the laws of physics.
And now, given the rise of cyrptocurrencies and crypto assets to quasi-mainstream financial assets, we're dedicated to providing quality, relevant, and interesting material on cryptocurrencies and cryptoassets. Articles on Bitcoin, Ethereum, Ripple, Cardano, and many more cryptocurrencies and cryptoassets can be found on Pennies and Pounds - all that in addition to a plethora of information on what cryptoassets are, how the entire crypto industry came to be, blockchain/immutable ledger technology, mining, proof of work, proof of stake, and how to prudently invest in crypto if you are so inclined (based on your risk tolerance and ability to withstand the volatility that will come with a crypto portfolio).