Want to be rich? - Part 8

There is just one golden rule when it comes to becoming rich. Aand that is ...

You should earn money even when you are not present.

So that rules out jobs.
Or even business where you need to be present all times.

Building a business where you employ clever employees is definitely a very big yes.
Investments in property, shares, mutual funds are a yes.
And surprise, surprise, monetized blogs (such as this one) are also a yes. At least for some (No! Not me! Not yet!)

The trick is to start early.
Reason: You have sufficient time to recover from setbacks - there will be setbacks, guaranteed. Youth is not risk averse. So that helps.

More importantly, the real benefit of compound interest kicks in.

How much do you think you get if you invest merely Rs. 2000 per year for 25 years that returns you 10% compounded annually. It is Rs. 2,16,363 ( more than 4 times)

You are risk averse?
You would like to put the money in a recurring deposit bank scheme that gives you just 5% returns compounded. In 25 years your money will become Rs. 1,00,227 (a shade over double)

But you should have 25 years with you. So don't start at 40. Start when you are 25 years old.

The Black Swan Predicted Financial Collapse

If I had pots of money, I would buy a copy of The Black Swan and distribute a copy of The Black Swan to every banker, economist and policy maker and all those hanging out at Davos.

Now, you have to remember that this book was published in 2007 and I am assuming the book would have taken about 15 months to complete (or more!) Read this extract ...

A similar effect is taking place in economic life. [G]lobalization; it is here, but it is not all for good: it creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial institutions have been merging into a smaller number of very large banks. Almost all banks are now interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks ... - when one falls, they all fall. The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard.

And then in the footnote, Nassim Nicholas Taleb goes on to say ...

As if we did not have enough problems, banks are now more vulnerable to the Black Swan and ludic fallacy than ever before with "scientists" among their staff taking care of exposures. ... [T]he government sponsored institution Fanny Mae, when I look at their risks, seems to be sitting on a barrel of synamite, vulnerable to the slightest hiccup. But not to worry: their staff of scientists deemed those events "unlikely."

Spooky or what?

Just one clarification.
The Black Swan is not about prediction. It is about the unpredictable. The above extract is an example of how one should anticipate the unpredictable.

Picture Courtesy: 'Rolve'

Amateur Investors

I had to double check the date Against The Gods was published. In the chapter, 'The Fantastic System Of Side Bets', which I missed the last time I read this book, is a small foot note that I have reproduced below:

"Most individual home mortgages are packaged with other mortgages and sold off in the open market to a wide variety of investors. In effect, the bankers have traded off the risks of prepayment to a market more willing to bear that risk; these mortgage-backed securities are complex, volatile, and much too risky for amateur investors to play around with."

I was under the impression that the present crisis was due to an instrument of a more recent origin. Evidently I was totally wrong. Against the God was published in 1996.

I wonder who Bernstein thinks are "amateur investors".

Note: The photograph used belongs to Myles Davidson. Please go here to see more such photographs