Do You Know the Difference Between Being Rich and Being Wealthy? - WSJ - 1 views
www.wsj.com/...-and-being-wealthy-11596808802
wealth income money finance investment success analysis psychology
shared by Javier E on 09 Aug 20
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Mr. Housel, 36 years old, is a blogger and venture capitalist who writes beautifully and wisely about a central truth: Money isn’t primarily a store of value. Money is a conduit of emotion and ego, carrying hopes and fears, dreams and heartbreak, confidence and surprise, envy and regret.
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Investing isn’t an IQ test; it’s a test of character. Unlike the man who chucked coins into the sea, Mr. Read could defer gratification and had no need to spend big so other people wouldn’t think he was small. From such old-fashioned virtues great fortunes can be built.
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Investors think of such volatility as a kind of “fine” for having made a mistake, says Mr. Housel. Instead, they should regard it as a “fee,” the unavoidable cost of participation. You never know how big the fee will be or when you will incur it, but patience can make it bearable.
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Most investors regard Warren Buffett as someone who has parlayed brilliant analysis, hard work and extensive connections into one of the best track records in financial history. Mr. Housel, however, notices that Mr. Buffett accrued at least 95% of his wealth after age 65.
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Had Mr. Buffett earned his world-beating returns for only 30 years rather than much longer, he would be worth 99.9% less, notes Mr. Housel. “The real key to his success is that he’s been a phenomenal investor for three quarters of a century,” he writes of Mr. Buffett. “His skill is investing, but his secret is time.”
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So Mr. Buffett—traditionally viewed as the greatest living example of investing skill—is also proof of the power of luck and longevity.
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In a similar vein, “The Psychology of Money” argues the biggest determinant of long-term returns often happens to be when you were born. Adjusted for inflation, people born in 1950 earned essentially nothing in the stock market between the ages of 13 and 30, Mr. Housel shows. Those born in 1970 earned roughly nine times as much on stocks in their formative years. Those born in 2000? They may have to save a lot more than their parents did.
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Bubbles form when catchy stories and the human need for imitation and conformity turn investing into a social imperative.
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Mr. Housel urges investors to think about what money and wealth are for. He draws a critical distinction between being rich (having a high current income) and being wealthy (having the freedom to choose not to spend money).
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Many rich people aren’t wealthy, Mr. Housel argues, because they feel the need to spend a lot of money to show others how rich they are
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He defines the optimal savings level as “the gap between your ego and your income.” Wealth consists in caring less about what others think about you and more about using your money to control how you spend your time.
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He writes: “The ability to do what you want, when you want, with who[m] you want, for as long as you want to, pays the highest dividend that exists in finance.”