How (Not) To Become Rich
Three fuckups you should definitely avoid
You want to become rich or a millionaire? Nice! Many of us want that too. With the current hype around Robinhood, Trade Republic and other trading platforms for millennials it is important more than ever to avoid certain mistakes, that me and many others did, and most likely you would do too.
Let me tell you how NOT to fail in becoming rich.
Today, there are several ways one can achieve financial wealth. You can start your own business, gamble your way up, inherit a large sum of money, start trading or invest in the capital markets, to name just a few.
However, this post is about investing in capital markets and three Fuckups I made as a beginner.
My interest in money and capital markets was already developed during my school time. Once, there was a country-wide competition where students could trade with fictitious money on the stock market and of course did I participate. Guess what, at that time it was definitely more fun for me than working for a physics exam.
In the end I did quite well, made a nice profit in a relatively short time, and once back home I did what everybody would do: I showed-off and tried to give my parents some tips on how to invest their money.
Back then, the answer I always got was: “Markus, don’t bother with all those stocks and focus on your next exams. We have our bank advisor and he will take care of everything.” At that time, I listened to my parents and dropped my investing ambitions.
Why this flashback to my school days? Well, later when I started studying at the University of Economics, I received a 4-digit sum from my grandparents. Since I didn’t need the money, I thought about what do with it. That’s when I remembered my parents’ phrase “Trust the bank advisor. He know’s best.”
If my parents trusted the bank advisor, then so could I too. So I went to the bank advisor and discussed an investment strategy for what to do with the money over the next few years. I believed to be in good hands and was convinced that I was doing the right thing. The first step towards becoming a millionaire was done!!! Woohoo! Or so I thought…
In the end, the bank delivered poorly and looking back now, I could have made a better decision! What was missing? Knowledge! This leads me to my…
Fuckup #1 — not having basic knowledge
I graduated from a commercial academy and studied at the University of Economics. So when talking to the bank advisor back then, I thought I knew it all. But that was not the case.
Either I didn’t pay enough attention in the relevant lessons or lectures at school, or I simply wasn’t taught a certain basic knowledge of how the capital market works. At some point I began to dig deeper into investing, read several books and blogs, listened to podcasts, watched YouTube videos and gradually expanded my knowledge. It was surprisingly easier than expected.
I am not saying that you must become an absolute professional on that topic. Because once you dive into this “rabbit hole“, you can be easily overwhelmed.
The more I learn, the more I realize how much I don’t know.
That’s how I still feel today. I continue to educate myself on a daily basis so that I can navigate my way through the financial jungle in the best possible way. If you stand still, you get ripped off at the end of the day…
If you decide, you want to educate yourself in the field and don’t know exactly where to start — just write me on LinkedIn and I be happy to recommend you one or the other source.
For those who still don’t want to deal with the issue, a very important tip: question ALL statements your advisor makes. The most important word here is “conflict of interest”. Always ask yourself “What does the other person get out of this? How much is he cutting in if I buy a product that she or he recommends?”
Unfortunately, the model of commission-driven investment advice has become state of the art. As a client, you can never be sure whether you are getting the best product for you or the best product for the advisor where they are getting the most commission.
The good news is, there are some advisors out there who truly put the client’s interest above their own — but these are in the absolute minority.
So either educate yourself in the subject of capital markets and make all the decisions yourself or look for an advisor where there are no commission flows towards the advisor and thus no conflicts of interest.
Obviously I chose the first path and fell into the next trap…
Fuckup #2 — overestimating your own abilities
Once you are inside this “rabbit hole”, you only see opportunities to invest your money. Whether it’s in stocks, funds/ETFs, commodities, gold, options, futures, peer to peer loans, cryptos and so on.
What many of us do at this point is to look for opportunities where we can multiply our money the fastest way possible. Why choosing something that makes a solid 8% a year over the long term, when you can make 10%, 20%, 50% or even 100% instead?
The risk is usually underestimated or deliberately downplayed and we start doing the wrong thing: gambling. When I started investing, I was no exemption. I invested in things thinking I understood them, but didn’t really.
In the beginning my investments developed great and I thought I was a genius. But it was far from that. I misjudged the risks and made investments based on emotions rather on knowledge.
It came as it had to come. As fast as my portfolio grew, so fast came the disillusionment. Once my total portfolio has dropped more than 87% from its peak and I started thinking and reflecting on my decisions. Looking back, it was an important lesson and even necessary to fall on my nose. It was the only way I could become a better investor.
Losses are part of it, no question. It’s just important to take calculated risks, be honest with yourself, know your loss capacity and don’t fall in love with your investment and thus become “blind”.
Ray Dalio, one of the most famous investors of our time once said:
“In order to be successful in the markets, it is more difficult than getting a gold medal in the Olympics. You wouldn’t think about competing in the Olympics, but everybody thinks they can compete in the markets.”
So it’s better to get a solid 8% return from a World ETF and have a good sleep than to speculate and have restless nights! 8% per year means a doubling of the capital in about 9 years — not bad if you look at the ratio of return to invested time. The magic word here is “compound interest”.
Fuckup #3 — Don’t take inflation into account
Once I invested in a government sponsored product. It didn’t produce super great returns, but they were at least positive. So it didn’t make me dissatisfied. However, at some point, I looked deeper into the issue of inflation and what I’ve found out just shocked me.
“Many years ago we received 4% and more on our savings account!” Who does not remember these awesome statements? I certainly hear them all the time from family members and clients. But was the 4% interest rate also real? No, it wasn’t.
Here’s a secret that nobody tells you. You have to consider the inflation, or in other words subtract it from the earned interest. What is an inflation? Simply said, your money is loosing value each and every year. With 100 Euro you can buy less today than 10 years ago.
In the following chart you can see when there is still something left of the interest after deducting the inflation.
Blue are the periods where you truly have earned something, as the interests are greater than inflation. If the bar is pink, you have lost purchasing power and the inflation has eaten up your interests.
What applies to the interest on savings accounts, also applies to the returns on shares, funds and other investments. In all the glossy brochures you’ll see the return before taking inflation into account. If your portfolio has not made more than about 1.8% per year in the last 10 years, you’ve probably lost money!
Investments that you thought were “safe”, such as government bonds, can quickly become a money-destroying machine. If you prefer to leave your money in the bank or under the pillow, you can also throw your money out of the window.
When I became aware of inflation and did the math again, I knew immediately what I had to do: I cancelled the products and put my money into other investment opportunities.
What I do today is, whenever I see estimated return figures, I automatically deduct the 2% inflation of it. This is the only way I can be sure that at the end of the day my money will not be less, but more!
Conclusion: Don’t try to win the gold medal
If you avoid these 3 pitfalls, I am sure you will see a rosy financial future. Stay realistic and please don’t try to win the gold medal at the very first attempt. The financial market is highly competitive, do your homework and don’t consider yourself as a rookie to be better than the experienced investors out there. You will most likely lose this game!
Better start small, keep learning, and improve slowly and always keep in mind:
In investing, time is your friend, not your enemy!
If you don’t want to deal with the subject yourself, but still want to benefit from the capital market, look for a truly independent investment advisor who does not receive commissions from third parties. Only then you can be sure that the advisor is acting in your best interest and that your hard-earned money will magically become more!
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