There are certain laws of the universe that are immutable. Due to the fact that they are not subject to change, I don’t tend to see them talked about often. However, I find the really big, boring ideas fascinating – especially those that have withstood the test of time. I think that it is human nature to take big, easy ideas and screw them up or make them harder than they actually are. So maybe this post will influence someone out there to slow down.
When asked “How to build wealth?” there are many, many answers to that question, and the answers are as subjective as the folks who you poll to get your answers.
Charlie Munger has a very easy system to get wealthy:
“Spend less than you make; always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer.”
Mohnish Pabrai seems to agree with Mr. Munger, giving a little bit more detail:
“Start investing early in life; Spend less than you earn and always be saving 5, 10 or 15% of what you earn; Maximize the use of tax-deferred vehicles like IRAs and 401(k)s; and Invest in low-cost index funds.”
Another very successful investor, Joel Greenblatt, has stated “The hardest thing about investing is the waiting. A temperament to do nothing is the most overlooked quality in investing.”
I’ve had a lot of conversations over the past year with folks of all ages about investing. Some have questions about retirement accounts, others are younger people just getting started. The unfortunate thing about living in the longest bull market in history is that there are thousands (maybe more) of different trading strategies out there, which all get put into the “investing” bucket. And, you know what? Some of them have pretty good results because, again, we’re in a historic bull market.
But one thing that I’ve noticed in all age groups is the inability to do nothing. And by do nothing, I mean literally buy a stock in a good company and leave it there – untouched – for years. That is how compound interest works. I have talked to folks who swear they are “buy and hold” investors be absolutely convinced on a stock on Monday and sell it all (or a portion of it) on Friday. And if you’re doing this, then not only are you interrupting the compounding effect that time has on money, but you’re also doing a heck of a lot of work – instead of letting your money work for you.
I read a few years ago that Fidelity did a study on its best performing accounts. The winners? Accounts where the owners had died, and accounts where the owners forgot their passwords and gave up trying.
So to recap, one of the secrets to building wealth is to spend less than you make and save money. It’s really hard to argue with that secret. Next, put it in a low-cost index fund, preferably in a tax-deferred account (Vanguard has good products here, although nowadays, nearly every broker has a low-cost index fund product). Lastly – and this point is the most important – just wait. There may be painful periods to wait through, and just grin and bear it. The 50-year average return of the S&P 500 Index is around 10% per year – but this means nothing if you’re moving in and out of stocks all the time.
Zachary Oliva is the: