4 Insights on Wealth Building From Morgan Housel

1. The Magic of Compounding

Housel points out that Warren Buffett acquired $81.5 billion of his $84.5 Billion net worth after his 65th birthday. True, he was a skilled investor, earning returns of 22% per year. But the real secret of his success was that he was able to earn pretty good returns and then stay the course with his investing program for 75 years. Buffett began investing at age 10 and was already worth $1 million by age 30 (or $9.3 million in today’s dollars). As the saying goes, it’s time in the market and not timing the market that makes all the difference.

(Warren Buffett (Photo: AP))

2. Tails You Win

You can be wrong half the time and still make a fortune. Not every investment is a winner. Far from it. It’s typical that many things will go awry. Investment success is often generated by just a few holdings. One study found that at venture capital firms just 2.5% of investments returned multiples of 10-20 times. Only 1% of holdings had returns of over 20 times. In 2018, Amazon accounted for 65% of the S&P 500’s returns. Buffett’s partner, Charlie Munger, put it this way: “If you remove just a few of Berkshire’s top investments, it’s long-term track record is pretty average.” Being well diversified via broad-based holdings of securities is critical to investment performance.

(Photo: Shutterstock)

3. Nothing’s Free

Enduring market volatility is the price of investment success. The S&P 500 index increased 119 fold in the 50-year period ending in 2018, when holding stocks worked out well for investors. But on any given day, many of those stocks traded well below their previous all-time highs. Netflix, for example, was up 35,000% from 2012 to 2018. But, during that time period it traded below it’s previous all-time high 94% of the time. Thus, trying to time the market and trade in and out at precisely the right moments is likely to be a money losing strategy. Housel counsels investors to accept the stomach-churning periods of market volatility as the fee for a successful buy-and-hold game plan.

(Photo: Shutterstock)

4. Wealth Is What You Don’t See

Appearances can be deceiving. The world is filled with people who seem to live a modest lifestyle but are wealthy, and many people who look rich but are overextended and living on the edge. “Wealth is the financial assets that haven’t been converted into the stuff you see,” Housel writes. True wealth consists of investment and retirement accounts that don’t get spent. It’s a hidden, below-the-radar form of success. Wealth gives its holders the freedom and flexibility to define their lifestyle and how they spend their time. Not spending money that they have now is how they get there. Housel clearly takes his own advice. An award-winning business writer and now partner in a venture capital firm, he describes his family’s own frugal lifestyle, which lets them live below their means and save money. His goal: the independence to make his own meaningful decisions.

(Photo: Shutterstock)