Big Issue
I saw a potentially interesting article in The Big Issue magazine over the weekend, which posed the question: “What advice would you give to your 16 year old self?”
Unfortunately
most of the respondents were self-satisfied celebrities who gave such
useful hints as: “I would advise myself to once again accept that
million dollar role in Spielberg’s film” or other such guff.
Celebrities,
like politicians, are well versed in the art of not side-stepping
questions, rather preferring to answer any poser with some pre-planned
self-promotion (did you see my appearance on Weekend Sunrise? Oh stop it, I’m joking!).
You often hear people say things like “I have no regrets” or “if I had my time again I would nothing different”.
While
it is true that we are ultimately the sum of our past experiences, I,
like most people, would aim to do a whole range of things differently if
I had my time again. I would try to spend less of my youth drinking
Guinness. I would definitely try to smoke less. Most pertinently I would
try to spend less of my time being an obnoxious twit.
For
the purposes of today’s blog post, however, I will restrict myself to
discussion of personal finance and investment. After all, I am highly
doubtful that you have visited the financial Blogosphere today to hear
such pearls of wisdom as “don’t be such a twit” (however incisive and
enduring that little gem of advice may be).
Instead, the eight ideas that I would pass on to my 16 year old self would be these:
1 – Start today
The
earlier you get started the longer you will have to compound your
wealth and small progress today can snowball into great returns later.
There will always (and I do mean always) be those telling you that now
is a bad time to start. Resolve to get started and if you make some
mistakes, so be it – resolve to learn from them.
2 – To compound your wealth, compound your education
Resolve to start learning about personal finance and investment and just keep learning.
I started 2013 I the same way that I started 2012, 2011 and 2010, by reading The Intelligent Investor by Ben Graham. This book is decades old but the relevance it continues to hold never fails to amaze.
If
you understand investment then you don’t need to rely upon hot tips,
hearsay and hogwash from others – you will know for yourself what
constitutes a sound long-term investment.
Graham
noted that after the Great Depression and a World War fewer than 5% of
surveyed people believed that stocks represented a good investment. In
fact, the dreadful run for the markets in the period after the Wall
Street Crash from 1929-1945 stocks were seen by most as no better than a
pure “gamble”.
And
yet think back to 2007: virtually anyone who bought a stock was
considered to be “an investor” – there was even talk of “nervous
short-selling investors having been burned” which is about as big a
contradiction as it is possible to make.
The
reality is that when everyone else believes the sky is falling this is
probably a fair indication that you will soon be able to buy quality
assets at under intrinsic value. Thus it proved in the decade or so
after the Second World War, with the Dow increasing an astonishing
fivefold from around 100 to above 500.
So
it is in property. A spate of commentators opining that “property goes
up 10% per annum” or “property is safe because you can see it and touch
it” was a sound indication that the end of the last great bull market
was finally drawing near.
3 – You don’t have to spend all of your money
You
often hear people say that they have come into some money so they had
better spend it on a car or holiday before a commitment comes along that
sees it ‘wasted’ on necessities. We should be very careful about the
vocabulary that we feed our brains as it tends to be far more powerful
than we ever realise.
I
sometimes get asked if “anyone can make a million”? It’s a bit of a
loaded question, but it’s certainly true that most people will come into
a million dollars through their lives. Consider this: if you earn, say,
$50,000 a year over a working lifetime of 40 years, then you will earn
$2 million without taking into account wage increases for inflation.
So the question of whether you can make a million dollars is probably the wrong one. The real question is, can you keep a million dollars?
Oh,
but what about expensive living costs, holidays and car running costs
say you might ask? Well, I never said that it will come easy, I just say
that it can be done. What are you prepared to sacrifice for your
financial success?
By
the way, the sacrifice needn’t be forever. You might have to forego
expensive holidays when you are younger, but once you have achieved a
certain level of financial success you will be able to go on holidays
better than any you ever dreamed of.
4 – Mates are only impressed by cars for one month
16
year old boys desire flash cars to impress people with. Come to think
of it, so do 35 year old boys. New cars tend to only interest your
friends for a relatively short period of time - then they just start to
cost you a lot of your hard-earned money.
By
the way, see point 3 – you can buy amazing cars when you are older and
wealthier. Better still, you can rent the cars of your dreams (and then
give them back afterwards).
5 – A big house can be a bind
Conventional
wisdom suggests that we should buy the most expensive house we can
afford as a principal place of residence. This is by no means
necessarily bad advice. What tends to happen is that people reach the
level of attaining a well-paid position then proceed take on an enormous
mortgage somewhere between the ages of 30 and 40.
If
you are successful in paying down the debt over the duration of the
mortgage this can lead to a good result, perhaps allowing you to
down-size for your retirement. Be wary, however, that taking on
ever-greater mortgage debt for your residence can restrict your ability
to build a portfolio of other investments.
6 – Invest for the long term
All
the evidence shows that if you can build a plan for the long term and
invest in quality assets you will finish well ahead. Don’t focus too
much on trying to outsmart the market over the short term – for most us
it’s no better than guesswork.
7 – Don’t listen to people who don’t know what they’re talking about
Every
weekday the news tells us that the All Ords has gone up or down by 20
points and everyone seems to have an opinion on what will happen to the
market next. In truth, most people are fooled by randomness: they have
sometimes guessed the market’s direction right before so they think that
they will be able to do so again.
It’s
fairly easy to work out whether someone knows their stuff: ask them
what the All Ords actually comprises and how the index is measured or
what the market’s average PE ratio and dividend yield are.
Much
the same applies to the property markets – we all have some experience
of property markets which seemingly creates instant experts of us all.
Everyone seems to ‘know’ where the property market is headed, despite
the greatest investors in history concluding that short-term outcomes
are not predictable.
8 – Never, ever give up
When you hit upon problems, this is just the universe testing your resolve...now go get ‘em tiger!
