Humans have an unusual relationship with time. Bill Gates said we overestimate what we can do in one year, and underestimate what we can do in ten years. Our problem with time can be explained by our lack of patience. We are living in an age of instant gratification. The Internet and technology mean we never wait for anything. When I was growing up, SportsCenter aired on Friday at 6pm for one hour. After it ended, I had to wait six days and 23 hours. Today everything is on tap, on-demand, same-day delivery, etc.
This lack of delayed gratification is lethal in your management of three fundamental parts of our lives - our money, our relationships and our education.
1) Time and Money
The world is full of wonders. The Great Pyramids of Giza, the Hanging Gardens of Babylon, the Lighthouse of Alexandria, the Temple of Artemis, and the Colossus of Rhodes. In finance, there is one single wonder that stands out above the rest – COMPOUNDING.
The majority of humans are not aware of this wonder because it requires a rare commodity – PATIENCE. We are impatient. We want to get rich quick. Getting rich, however, requires compounding and patience. Investing $100 per month at a return of 10 percent per year will deliver $226,048 after 30 years. How much would I have after 30 years if, instead of 10%, I generate returns of 20% year. The human brain, in all its feebleness, would reason like this – if I am earning double the return (20 percent instead of 10 percent), it should have double the money - $450,000.
What would you say if I said that by doubling the annualized return you would earn TEN times more? Your $100 investment at 20 percent per annum will yield $2,297,783 in 30 years!! How is this possible? Through compounding. Albert Einstein said that the power of compound interest "the most powerful force in the universe" and went on to say..." he who understands it earns it; he who doesn't, pays it."
You earn 10 times more with twice the return over 30 years because you are reinvesting your returns. You are earning returns on your returns. This is best understood with a simple example.
Assume you invest $100 on day 1 at a return of 20 percent per year. In one year, that $100 has grown into $120. In year 2, again you earn 20%, but on $120. This means that you made $24 which is actually 24 percent on the original $100 invested.
Look at how the returns take off the longer you invest.
Year 1: $20 (20 percent on $100)
Year 2: $24 (24 percent on $100)
Year 3: $28.8 (28.8 percent on $100) …….
Year 10: $103 (103 percent on $100) …….
Year 20: $638 (638 percent on $100 …….
Year 30: $3,956 (3,956 percent on $100)
By year 30, you are earning an astronomical return on you’re your initial $100 because the investment has snowballed as you reinvest your returns.
So how do we put compounding to work?
Many people do not invest because they are under the false impression that the only way to invest is through large lump sum amounts. So they religiously put money away in a low or no interest savings account until they have accumulated enough money to invest.
There are two problems with this approach. Firstly your money is laying idle. It is sitting on the couch, binge watching Netflix and getting lazy. It should be in the gym, pumping iron and sweating for you. The second problem is that the money in your savings account is vulnerable to unplanned withdrawals. In moments of carnal weaknesses, there is a temptation to dip your sticky little fingers into the savings jar. You need to get into the investing mindset. You need to invest smaller amounts continually and consistently.
You also need to invest your savings into a assets that meet the following requirements: 1) they accommodate small monthly contributions
2) they provide easy liquidity – your investment can be liquidated quickly and without penalty
3) they are transparent – you have pretty good idea as to how they generate returns
4) they have a long track record of delivering inflation beating returns
In my opinion, the assets that best comply with these four requirements are publically listed companies, or the stock market. It is easy to create a debit order off your bank account to commit to a monthly investment into the stock market. Secondly, most stocks are liquid. Thirdly, listed companies need to disclose their financial information every quarter and finally, the stock market is an inflation beater.
Over the past 30 years, the Standard and Poors 500 Index has delivered compounded returns of approximately 10 percent per year, and this return includes three major stock market crashes – the dot.com bubble bursting in 1999/2000, the collapse of Lehman Brothers and the Great Recession of 2008, and the Coronavirus pandemic of 2020.
So what is the plan?
Step 1: Relax
Most people are terrified of the stock market because it exhibits wild and volatile swings and this is true – in the short term. The stock market, over the longer term, tends to be more predictable and benign. Your first step is to recalibrate your opinion of the stock market and take a long-term view. You need to be patient and you need to be religiously disciplined in your investment.
Step 2: Monthly Contributions – Annual Consultations
Every month, you need to commit to investing a minimum amount of cash into the stock market and you are only allowed to check your account statement once per year.
Step 3: Choose a Low-Cost ETF
ETFs are powerful financial tools. I would recommend a broad-based country or global ETF such as the SPY or IVV.
Step 4: At Least $100 (or your local currency equivalent) a Month
All you need to do is invest $100 per month. To understand how extremely attainable $100 per month is, I did a quick Google search on what $100 can buy you these days: Eight or ten movie tickets, 10 months of Netflix, four or five new movies on DVD, fifteen used DVDs at a yard sale, lunch for four at a fairly nice restaurant, 40 cheap burgers or 90 candy bars.
2) Time and Relationships
You move to a new city and you have no friends. You are lonely and feel the world is judging you for your loneliness. You jump onto Tinder and hook up with the first person that expresses an interest in you. Before you know it, you are unhappily married, with 3 kids, living in the suburbs, and commuting 2 hours a day for a job you hate to finance the life you despise.
We are impatient with our relationships because we are scared of being alone. Time alone is seen as being a poor reflection on who we are as people. It seems to indicate that we are socially undesirable and that there is something inherently wrong with us. Let me test something on you. Would you go to a restaurant by yourself? Would you go to the movies by yourself. I would wager that the majority of you would answer NO to both these questions. Why? Not only are you afraid of being alone, you are also afraid of being seen to be alone. What will people think?
Make some friends first. You need to find a tribe centered around a common interest. Join a motorcycle club or a running/biking/swimming/surfing club. This will reduce the probability of making stupid and unhealthy relationship choices. This patience will not only make you happier, it will also make you more prepared to enter serious long term relationships. The time alone will help strengthen your self worth and give you a better idea of who you are. Self awareness is a key ingredient to a healthy and happy relationship.
3) Time and Education
After finishing school, we are overwhelmed with a sense of urgency. We need to get into university, get our degree, and make money as soon as possible. We don’t take time to think carefully about what we want in life. We jump into a career that we think we want, but it turns out that we are doing what is expected of us. Five years into the degree, we drop out and take a year off to travel and discover ourselves. You need to take a deep breath and not be in such a rush to plunge into the workforce. Travel first (if you have that luxury). If not, take a gap year and pursue your interests locally. Meet people, understand the business and social world outside of school, and make every effort to understand what you truly want out of life.
Another factor to consider before embarking on an expensive trip through a tertiary education institution is the value of a university degree. In 2018, job-search site Glassdoor compiled a list of top employers who no longer require applicants to have a college degree. Companies like Google, Apple and IBM are all in this group. In 2017, IBM’s vice president of talent Joanna Daley told CNBC that 15 percent of her company’s U.S. hires do not have a four-year degree. The message from these companies is that a traditional college degree does not necessarily equip graduates with the requisite skills to operate in their world.
The market value of a university degree has declined while the cost of that education has increased. In the 1980s, a college degree almost guaranteed a job in the specific field of study. This is no longer the case given the higher number of degrees and the shrinking number of jobs on account of technology and automation.
I have come across numerous taxi drivers in Latin America who hold MBA degrees. Driving a taxi is a noble profession. I, however, doubt whether those entering a two-year MBA programs do so visualizing a career picking up American tourists at the airport.
In the face of this, the cost of a university degree in the U.S. has more than doubled since the 1980s. Student debt in the U.S. in 2019 stood at $1.4 trillion. University education in the U.S. is now more expensive than marrying a Las Vegas showgirl. The problem is not only the debt. The problem is also that the skills acquired in the accumulation of this debt no long correlate with what is required in the real world.
So what is the point of all this?
You need to extend your time horizon. You need to be patient. Radical short-term goals will mostly go unreached – look no further than mankind’s inability to stick to New Year's resolutions. Radical goals leave you demoralized and passive. You need to set small short-term goals. The changes made in achieving these goals will compound into large changes in the medium to long term. Life is a marathon – it is not a 100m sprint. You don’t need to be Usain Bolt to succeed - you need to be that skinny marathon runner that is prepared to plod slowly along and suffer more than everyone else.
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