Three Steps to Take Before Starting Investing

As most people know, investing is a smart thing to do. While you go out to work for the day, you’re happy knowing that over time, your money is working for you too.

Especially with uncertainty over the future of state pensions, investing is a subject that is becoming more important for financial security and freedom going into retirement ages. According to Andrew Craig in his book How to Own the World, anyone under the age of 50 should assume that the government will be in so much debt by the time you retire, that they will no longer be able to offer you a state pension.

But before you jump in with two feet, what are a few things you should make sure of before you start your investment journey?

Pay Off Any Non-Student/Mortgage Loan Debt

There’s no point investing until you have paid off any debt that isn’t from your student loan or mortgage. The reason being is that some types of debt such as credit card debt have high rates of interest. This means that even if you are making a solid 10% return on your investments, you will be paying 20%+ interest rates on your debt – basically placing yourself on the wrong side of compound interest.

Build An Emergency Fund

The last thing you want to do is have to sell your investments because you lost your job or an unexpected expense came up, so before you start investing make sure you have a comfortable amount of cash in a savings account as a security blanket. Selling off your investments can increase your investment fees, but it also encourages you create a habit of doing it in the future too, which can lower your investment returns for years to come. Six months to a year’s worth of expenses should be ample in an emergency fund.

Create An Investment Plan

It’s not wise to just wing it when it comes to investing. Figure out which investment vehicles you want to put your hard-earned money into, and decide what your psychological risk tolerance is. The key is to create a plan and have the discipline to stick to it. Decide the frequency and the amount you will be investing, and how diversified you want to be – whether to buy stocks, bonds, commodities, real estate, precious metals or even cryptocurrency. A lot of new investors will dabble in certain investments, and withdraw their money as soon as any losses appear. The investor that has a solid plan will be able to ride out any market uncertainties because they have already rehearsed beforehand what they would do in that situation.

Which Lessons Do We Have to Learn the Hard Way?

In Herman Hesse’s 1922 novel Siddhartha, the troubled protagonist Siddhartha asks his friend how he can protect his son from the excess pleasure and power that he lost himself in during his life, and how he could possibly stop his son from repeating his own mistakes.

His friend replies: “Do you actually believe that you committed your foolish acts in order to spare your son from committing them, too? How could you possibly protect your son from Samsara [the material world]? How could you? Through prayers, lessons and admonition? My friend, have you entirely forgotten that story about Siddhartha, a Brahmin’s [the highest caste in Hinduism] son, that contains so many lessons and which you once told me here on this very spot? Who kept Siddhartha the Samana [a type of wandering ascetic] safe from Samsara, sin, greed, and foolishness? Were his father’s religious devotion, his teacher’s warnings, his own knowledge, or his seeking able to keep him safe? Which father or teacher was able to protect him from living his life for himself, soiling himself with life, burdening himself with guilt, drinking the bitter drink for himself, or finding this path for himself? Do you think, my friend, that anyone is spared from this path? That, perhaps, your little son will be spared because you love him and want to keep him from suffering, pain, and disappointment? But even if you would die ten times for him, you would not be able to take even the slightest part of his destiny upon yourself.”

The moral here is, that in general, future generations will repeat the same mistakes as past generations, no matter how hard we try to teach others of our own mistakes. Siddhartha’s friend highlights that not even his own father, who brought him up in a rich and nurturing environment, could stop him from wanting to leave home to become a nomad, and later an addicted, greedy merchant – Siddhartha still followed his instinct and went on the journey that led him now to the point of thinking about how best to raise his own son.

Sometimes we have to learn the hard way for a lesson to actually sink in. Finding out that stove-tops are in fact hot to touch, or knives are in fact sharp. Or in later life, that status, power, lust, and greed may not be the most valuable things to chase. We have been taught these lessons already, but sometimes we have to experience it for ourselves for us to fully accept them.

The Hidden Flaw With Following Your Passion

People always tell us to follow our passion. But Chip & Dan Heath, the authors of The Power of Moments, highlights that passion is individualistic. They argue that although passion can energize us, it can also isolate us if the passion isn’t shared with others. The Heaths argue that purpose, on the other hand, can knit groups together as it is something that people can share.

If I followed my passion, I would just be playing Football Manager for 12 hours a day, winning 15 consecutive league titles with Manchester United, until the last of the current squad members finally leaves the club (it’s Hannibal Mejbri by the way).

Or if I followed a different passion, I would be practicing snooker all day in a journey to making my first century break and becoming as good as I can possibly be. Or I could try the same in golf maybe…

The main point is that I have spent 12 hours a day on Football Manager for about three straight weeks on multiple occasions, and I have practiced snooker for hours on end to be try to be as good as I can possibly be. The problem is, no-one cares as much as you do about it. There is no sense of contribution or purpose to being really good at a video game (unless you’re so good that people watch you play), and even if you are the talk of the town because you made the highest break in the snooker league that season (humble brag), it felt like something was missing.

The problem wasn’t in the activities I was subscribing to, it was the way I was doing it – it was individualistic. Playing video games with friends can be a good way to spend quality time together, and playing snooker for the simplicity of playing instead of competing can be a meaningful form of recreation. Instead I was optimizing for performance – I was physically isolating myself to limit distractions while playing Football Manager, and I was constantly worried about losing at snooker that I was untalkative with my teammates.

The key is to find purpose in your passions, to cultivate a sense of community and to build relationships through your passion instead of becoming isolated by them.

Skin in the Game: The Fundamental Question To Ask Yourself Before You Take Advice

The world seems to always give us advice. Friends tell us which Netflix shows to watch, families tell us what job to take, self-help books tell us how to spend our mornings. We get given so much advice that we have to somehow figure out which advice is worth taking.

The main question to ask yourself is: “Does the person advising me have skin in the game?” That is, what kind of losses are exposed to the advisor if this goes wrong? If your friend is telling you to buy bitcoin, you should find out how much money they would lose if bitcoin lost its value – if the answer is zero, you should run in the other direction.

This is precisely what happened on Wall Street, where fund managers got bonuses for wins but paid no penalty if they lost. In turn, they ended up taking high risks with other people’s money, knowing that they had no skin in the game and that taxpayers could rescue any bad decisions.

In contrast, Warren Buffett owns about 16% of the multi-billion dollar fund he manages, so if the fund loses, he loses in a big way.

Nassim Nicholas Taleb, the author of Skin in the Game, suggests we should take note of people who stick up for a truth that makes them unpopular, or people who act in a way that risks ostracism. He writes simply, “Avoid taking advice from someone who gives advice for a living, unless there is a penalty for their advice.”

Want to know another stance on advice-taking? Click here.

In Today’s Information Age, Execution Is Key

Back in our parent’s generation knowledge was power. In the 1970s only 8% of young adults were going into higher education, while nowadays the figure is closer to 50%. On top of that, the rest of the world are becoming more educated, with more access to resources. The rise of the Internet means we are now in an information age where knowledge is abundant. If you don’t know a simple fact, Google will tell you.

So if knowledge is no longer as powerful, what has replaced it? Execution. The abundance of information in the environment nowadays means that individuals can pretty much choose any vocation that they wish to. The problem for young people now is choosing something to do, and following through on it.

Those who have the courage to execute reap the rewards in comparison to those who are continually seeking knowledge only. A lot of insight can actually come during the experience too, and this type of insight is more impactful if you’re out there in the arena of life instead of simply studying theory.

Entrepreneur Gary Vaynerchuk consistently advises millennials to “stop thinking and just do.” Your young adult life is supposed to be about trying new things, figuring out what you like and don’t like, what you’re good or not good at, and having the advantage of time to course-correct. The way to achieve more in the modern day? Think less, do more.

Chasing Daylight: Eugene O’Kelly’s Three Months to Live

In May 2005, Eugene O’Kelly was diagnosed with late-stage brain cancer, and given three months to live. Within two weeks, he quit his job as CEO of accounting giant KPMG and scrapped all the plans he had made with his wife and two daughters.

One night at the dinner table, O’Kelly drew a map of his relationships, and grouped them into five circles. His aim was to “beautifully resolve” his relationships, starting with the outer circles and working his way inwards.

In his outer circle he contacted them by phone or email, highlighting favorite memories and appreciation for the other person. He decided to meet his third and fourth circles in person – he would meet them for an exquisite meal, or in a beautiful park for a walk, to share memories and gratitude for what they had done for each other. O’Kelly called these encounters “perfect moments”, and it was his mission to create as many of these as possible in the little time he had left.

By August, he was focusing on his inner circle, and spent his time with his closest friends and family. A couple of weeks later, on September 10, 2005, O’Kelly died.

O’Kelly wrote a memoir, Chasing Daylight, where he began with, “I was blessed. I was told I had three months to live.” And he took it literally – he was told he had three months to live, not to die. O’Kelly “felt like [he] was living a week in a day, a month in a week, a year in a month – meaning he condensed his life by having more perfect moments in three months than he would have done in five or ten years of living his normal life.

So what if we could have more perfect moments too, without the news of a terminal diagnosis to motivate us to do so? In fact, not all of us will be as lucky as Eugene O’Kelly – some of us might not be given any warning at all when our time is up.

The World Treats You the Way You Expect to Be Treated

When I first started off as a door-to-door salesman, I was nervous. My perception was that no-one ever bought anything at their door, and I would have people being rude and telling me to go away, slamming their door in my face.

In my first few weeks and months, this happened just as I expected. But it seemed like the other more experienced salespeople hardly ever had this happen to them. Somewhere along the way, I learned to visualize positive reactions out of the people I was meeting door-to-door. I began to expect a different, more receptive response when I knocked on people’s doors. And, slowly the responses became more positive, and it became rare that I was met with a rude homeowner.

I started to see myself as a good salesman, and then people were treating me in such a way too – they started buying from me. I started expecting them to buy from me too – and more people did.

It’s likely that simply expecting more isn’t the only factor at play here. Obviously, with time my competencies as a salesman improved, and naturally I became less negatively affected by rude remarks, so I was less likely to take things personally if and when they happened. If interactions did go sour, I would have strong boundaries and remove myself from situations I deemed unacceptable.

This concept of being treated the way you expect can translate to general life too. Some people are constantly embroiled in drama and toxic relationships, while others seem to be able to avoid it all. It’s hard to imagine that this happens by chance – it’s more likely that people who attract drama expect and are willing to accept unnecessary conflict instead of having healthy boundaries and picking the right battles to fight.

The world treats you more or less the way you expect to be treated. So start expecting more.

The Permanent Portfolio: How to Invest Without Losing

The biggest fear people have when thinking about investing is that they don’t want to lose any money. If you were to do some number-crunching: if you lose 30% of your investment, you need a subsequent 42% gain to recoup your losses. If you were invested into the S&P 500 in 2008 when it lost 50% of its value, you would need a 100% increase to get back to where you were. Seems a little unfair right? But that’s why it’s called the break-even fallacy. This phenomenon is probably why Warren Buffett’s number one rule of investing is simply: “Don’t lose.”

Now that we know how important it is not to lose while investing long-term, how do we go about it?

In How to Own the World, author Andrew Craig outlines a simple portfolio that has only five losing years in the last 37, the worst being only 5.3%. The portfolio even had a positive year in 2008, the same year where the whole world was in financial crisis. The portfolio had an average 7.5% annual gain over the last 37 years.

It might not seem a lot to average 7.5% per year, but putting $100/month in this kind of investment would bring you $17,957.60 after 10 years, $55,500.52 after 20 years, $134,428.85 after 30 years, and $300,363.77 after 40 years. If you just kept the cash you would have amounted to $48,000 in that time. Even worse, if you spent that extra $100/month you’d have $0 after 40 years.

This asset allocation was created by Harry Browne – his idea being that if you owned a diverse range of assets, you should always have something that performs well.

The allocation is:

  • 25% stocks
  • 25% long-term US bonds
  • 25% gold
  • 25% cash

The reason why this combination works so well in managing risk is that these asset classes thrive in different market conditions. Gold is a good bet in times of inflation, while stocks grow in line with economic growth. Bonds are useful to own in times of lower than expected inflation or lower than expected economic growth. Cash gives you liquidity, no fees, an albeit small interest rate, and stability when the others lose value.

The advantage of this type of portfolio is the simplicity – you will only need to buy into two or three different funds and rebalance periodically. Even better, you won’t have to manage your emotions as much because there will be much fewer losing years than with most other types of investment portfolio.

The Government is Doctoring Inflation Rates To Secretly Confiscate Your Wealth

Inflation is defined as the rate of which the price of goods and services increase.

If you were to imagine the cost for a can of drink at the vending machine, petrol at the pump, housing or bread, the prices would have been much lower when you were growing up than they are now. That’s inflation in action.

If our wages don’t keep up with inflation, then our money doesn’t go as far and the standard of living falls.

So what is the current inflation rate? As of January 2021, the government quotes it at 0.7%. Compared to the 1970s where there was rampant inflation, this figure is historically low. Losing 0.7% of the value of your cash savings each year is a minor nuisance at best, and if your interest rate in your savings account matches that, then you wouldn’t be losing any value in your money in real terms at all. But there’s a twist in the tale.

What if the government’s figure of 0.7% didn’t actually match up to what’s really going on with prices in the country? What if real inflation was closer to 10%? After all, the US and UK governments have been inventing trillions of dollars of money in recent times in a process called quantitative easing, which is known to cause inflation.

In 1996, governments in the USA and UK decided to change the way that inflation rates would be calculated. They now use certain tricks such as substitution (using the price of the cheapest available type of product in the category they are calculating), geometric weighting (if they find something that has gone up a lot in price such as healthcare or property, they will assign an inappropriately low percentage of the calculation), and hedonic adjustment (reducing the price of an item like televisions because the item is higher quality than it was the year before). Hidden inflation is becoming more common too, such as when companies give you less of a product like Dairy Milk or Walker’s crisps for the same price, hoping that you won’t notice.

Even if you don’t understand this last paragraph fully, it basically means that the government is tweaking around figures in a formula to get a desired result, instead of doing it fairly. But why would they want inflation rates to seem lower than they actually are?

Firstly, because GDP numbers are inflation-adjusted. If governments are adjusting for inflation by their own fake figures instead of the real ones, it makes it look like the economy is growing even if the economies are actually going backwards. Put another way, because real inflation is at least 7% higher than quoted, it means that if the stock market isn’t growing at least 7% per year, people who invest into it aren’t actually profiting at all in real terms.

Additionally, governments want to quote low inflation rates so they can get away with meagre pay rises like the 1% it is giving NHS workers across the country. The news was not taken lightly after over a year of NHS workers being stretched to the limits during the COVID-19 pandemic. But, imagine if the government had given the 1% pay rise and then broke the news, “Oh, by the way, inflation is actually at 8%, not 0.7%.” The government would have basically rewarded the NHS workers by reducing their spending power by over 7%. The funny thing is that this is the reality.

It’s in the government’s best interests to keep the inflation rates lower than they really are – it makes them look better, and keeps the public from realizing that their standard of living may be dropping.

So, what if you’re reading this and you have excess cash that is sitting in a checking or savings account? You obviously won’t want the value of it to go down by 10% each year. Andrew Craig, the author of How to Own the World suggests to find a way to ‘own’ inflation. This means to buy things that we know are going up in price along with inflation – property, gold, commodities and shares.

Calm Is Contagious

Former Navy SEAL commander Rorke Denver described the best lesson he had learned from a master chief in the Navy – that when you’re a leader, at a minimum everyone is going to mimic you. So simply: “Calm is contagious.”

Staying calm even everyone around you is losing their composure and running around like headless chickens, means that you can stay detached enough from the situation that you can still think clearly and objectively.

But, as a byproduct it keeps everyone else a little calmer too. Nelson Mandela was once on a flight where he noticed that one of the plane’s propellers had stopped working. He notified a friend on the plane, who then relayed the message to the pilot. The pilot already knew about it and had already called the airport to make an emergency landing. And while the friend feared for his life, Mandela was just seen reading his newspaper, just like he had been before he noticed the engine fault. When the plane made the emergency landing and Mandela was on the tarmac, he leaned over to his friend, “Man, I was scared up there.” Mandela was just as frightened as his friend, but he showed the courage to stay calm. If he had displayed his fear and panic, he would have likely made everyone around him panic even more.

In life there will be times when you are a role model to others – whether to a younger sibling, friend, new hires at work, to your child, to your community. And so, it’s not only calm that is contagious. Compassion is contagious. Kindness is contagious. Joy is contagious. On the other hand, anger is contagious. Envy is contagious. Deception is contagious. However you act, there will be someone out there that will use that as a template for their own life. So act accordingly.