How can an uneducated person outperform someone with a high-level university education? There’s one answer to this question: financial success is not a difficult science, it’s a soft skill where psychological behavior excels over knowledge.
The main goal of this article is to demonstrate the superiority of psychological skills over technical financial knowledge. I will do this in a way that enables you to make better financial decisions. Engineers can accurately determine the reason for a bridge’s collapse because the laws of physics are indisputable. But in the financial field, everything is different, as everything is linked to the behavior of a large group of people, and exploiting this behavior is the secret behind wealth , and that’s what we’re gonna learn in this article.
Some people behave crazily with money, but no one is truly crazy, here’s the whole thing:
Generations of people are diverse, raised by different parents with diverse backgrounds. They possess different values, live in different parts of the world, born into different economies, deal with diverse job markets and have different incentives and degrees of luck
Each one of them learns lessons differently from the other, shaping their distinct perspective on how money works.
Everyone has their unique experiences in the world, and what one personally undergoes is more convincing than what he learns from another person. Thus, each individual has their own perspective on how money works. What may seem crazy to you could be entirely logical for someone else.
The person raised in a poor or middle-class environment contemplates risks in ways that a wealthy banker’s child may not comprehend, even if he tries his best.
The person who grew up in the era of high inflation experienced circumstances that a person who grew up with stable prices never knew, and the stockbroker who lost everything in the Great Depression experienced a situation that can’t be understood by someone who lived in the glory of the 1990s.
Therefore, the list of experiences is endless. These experiences control our living conditions, and this is not because one of us is smarter or has more information than the other, but because we live different and equally convincing lives for us.
Perhaps your personal experiences with money represent 0.000001% of what happened in the world, yet they can shape 80% of how you believe the world works. which is why we differ in the way we invest or spend money.
Data tables, for example, can illustrate what happened during the Great Depression, but they will not give us the feeling of someone who lost everything, on his way home to meet his children. These painful consequences automatically change human behavior.
A study conducted by the National Bureau of Economic Research found that personal experiences influence our investment decisions. So intelligence or educational level is not directly related to wealth; rather, your place of birth and the time period in which you grew up play a significant role in shaping your financial relationship. For example, if you were born in 1979, you would find that during your twenties, the S&P 500 index has increased approximately 10 times.
But if you were born in 1950, the market remained stagnant during your twenties. This means that the age difference is the key distinction in economic perspectives. Each person will have a different view on how the stock market operates based on their own experiences. So we should not expect to hear similar financial information from them; each person has their perspective built on their unique journey. What one group considers crazy may be entirely logical to another.
Luck also plays a big role in our financial condition. Do you wanna see how ?
In 1968, Lakeside High School in the Washington area was able to provide a computer.
According to United Nations statistics in 1968, there were approximately 303 million people of secondary school age in the world, about 17 million of them lived in America, with around 270,000 residing in Washington state, and more than 100,000 were in the Seattle area, and around 303 schools were located in Lakewood.
We started with 303 million, and ended with only 300, Bill Gates happened to be one of those 300. Imagine if Bill Gates’ mother had enrolled him in another high school, would Bill Gates have achieved what he achieved?
We believe Mark Zuckerberg is brilliant for rejecting Yahoo’s 2006 offer of one billion dollars to buy his company, but he stuck to his company and did not sell it.
People praise Mark but strongly criticize Yahoo for refusing Microsoft’s acquisition offer, many praise Mark for holding onto his company instead of opting for quick money, many saying those idiots should have taken the money instead of holding on to the company.
Both companies took risks for their futures — the first succeeded, and the second failed
This is why you must be careful when you assume that 100% of results are due to effort and good decisions. You must realize that success does not come only with hard work, and that poverty is not always due to laziness. Keep this in mind when judging people, including yourself. What is good is not as good as it seems, and so is what is bad.
Warren Buffett’s Way Of Investing
There are more than 2000 books on how Warren Buffett built his wealth, and many of these works are excellent. But just a few of them give enough attention to the simplest fact about Warren Buffett’s investment success: his wealth doesn’t stem merely from being a good investor, but from being a good investor since he was a literal child.
Warren Buffett’s current wealth is $128.7 billion, and from this vast amount, $128.4 billion came after his fiftieth birthday. Imagine if he had retired at the age of fifty or sixty, only a few people would have heard about him.
When Buffett turned 30, his net worth was $9.3 million, adjusted for inflation. Imagine if he were an ordinary teenager spending his twenties exploring the world and finding his passion, starting with a modest net worth of, let’s say, $25,000 by the age of thirty. Assuming he continued to earn a 22% annual return on his investments, he could retire at sixty and spend time with his grandchildren.
( you can watch this article as a video here )
What will be the approximate estimate of his net worth today? It won’t be $128.7 billion, but only $11.9 million. Warren Buffett’s skills lie in investing, but his secret is time, this is the way compound growth works.
Buffett is the richest investor of all time, but in reality he is not the best. James Simmons’ wealth increased by 66%, compared to Buffett whose wealth increased only 22%.
But Simmons’ fortune is only $30.7 billion, which is nothing compared to $128.7 billion.
The question arises: why this significant gap if Simmons is considered a better investor than Buffett?
Simon did not excel in investing until the age of fifty, while Buffett had been investing his money since he was ten. Simon had less than half of the year Buffett had to double his wealth.
And If Simmons had earned an annual return of 66% for seventy years, the period during which Buffett built his wealth, Simon’s wealth would have been terrifying. Do you want the number? Hold your breath because it would be: 63 quintillion, 900 quadrillion, 781 trillion, 780 billion, 748 million, and 160 thousand dollars.
The secret here, my friend, is not to seek the largest possible annual return, but to seek good returns that can be committed to and repeated over a longer period of time. That’s how wealth is built.
But when the impact of compounded force is enormous, the opposite scenario is earning massive returns that cannot be retained, leading to some tragic stories.
Let me tell you a quick story about two investors whose names dominated headlines. They did not know each other, but their paths unexpectedly crossed. The first is called James Livermore, the greatest stock trader of his time. His fame spread in 1929, making him famous throughout the world.
In 1929, more than a third of the value of the stock market was wiped out within one week, which was called the Great Depression.
Reports of suicides among traders on Wall Street spread across New York, instilling panic in Livermore’s wife. When he returned home, she and their children greeted him in tears. Livermore stood confused at the door for moments before realizing what was happening.
So He quickly conveyed the good news — He succeeded in betting on the decline of stocks, and in moments he became one of the richest men in the world during one of the worst months in the history of the stock market.
And While the Livermore family celebrated their strange success, another man wandered the streets of New York broken-down after losing everything. It was Abraham Germonski, a wealthy millionaire who works in the real estate sector. Germonski, like many millionaires of his time, had gambled everything on the rise of the stock market.
His wife said that one of her friends saw him late at night on Wall Street near the exchange, tearing up data sheets into small pieces and scattering them on the sidewalk — that was the last time he was seen.
The story of Germanski ends here, but Livermore’s story is not over yet.
After his huge boom in 1929, Livermore overconfidently continued to gamble more and more, and eventually lost everything in the stock market.
Bankrupt and seemingly overwhelmed by shame, Livermore eventually took his own life.
The timing may differ, but both Germonski and Livermore shared one characteristic — they were both very good at getting rich, and both bad at staying rich.
You may not be as rich as the two of them, but my friend, you must learn that getting money is one thing, and keeping it is another thing.
Obtaining money requires risk and optimism, while retaining it demands the opposite — humility and fear of losing what you’ve built too quickly. It’s about the ability to survive, not just intellect and insight; it’s the capacity to survive for a long time without withdrawing or surrendering.
This is what makes the biggest difference. This idea should be the cornerstone of all your strategies, whether in investments, your professional life, or your Business.
There are two reasons why a survival mindset is important when dealing with money:
Firstly, avoiding extreme risk-taking to prevent the possibility of losing everything, as happened with Livermore and Germonski.
Secondly, the compounding effect, as we have seen before, amplifies the impact of enduring and persevering over time.
Compound power is the cultivation of money. There will be no significant progress in tree growth for one year, but ten years are enough to make a huge difference, and 50 years can make an even bigger difference.
Warren Buffett’s success secret lies in not succumbing to debt, not panicking, and not selling a single stock during the 14 recessions he experienced. He didn’t tie himself to a single strategy, perspective, or direction, nor did he depend on others.
He didn’t exhaust himself or retire, He survived, Survival gave him longevity. He invested constantly from the age of ten to the age of eighty-nine, and that’s where the wonders of compound strength worked its magic. It’s the key to his success.
The most important part of any investment strategy is planning, but the most important part of the plan is planning in case the plan does not go well.
If you’re planning for the next twenty years, you need to consider the events of the past two decades that no one could have predicted — from 9/11 to the 2008 crisis that caused millions of Americans to lose their jobs and homes, the record highs in the stock market, and the ongoing impact of the COVID-19 virus on the economy.
Many bets fail not because they are wrong bets, but because they assume an ideal scenario perpetually. This is where the importance of allowing room for error, also known as a safety margin and it is one of the important financial forces.
Art Dealers Strategy :
In 1936, Heinz Berggruen fled Nazi Germany to settle in America, and by the 1990s, Berggruen had become one of the most successful art dealers of all time. In 2000, he sold part of his huge collection, including Picasso’s paintings and big works by other artists, to the German government for over 100 million euros. This act served as a donation to the German government, because the paintings were worth more than a billion dollars.
It’s an amazing investment, but how can someone early in their life anticipate which artworks will become some of the most sought-after in this century?
Let me tell you how, major art dealers buy everything they can and stash it away; They don’t have to like the painting. They just sit and wait for a few winners. That’s it.
Maybe 99% of what they bought is low-value, but if 1% includes works by a successful artist like Picasso, that 1% can be worth billions.
Many businesses and investments operate on this principle, where a small number of events drive the majority of outcomes. Anything massive, profitable, famous, or impactful is often the result of one event among thousands of events — this is known as the “tail events.”
Every four out of ten major companies experience significant losses over time. For example, 40% of companies listed on the Russell 3000 index actually fail, with only 7% achieving remarkable success. This has multiplied the Russell index more than 73 times since 1980 — This is a wonderful return, No, this is success itself.
a large part of Apple’s success was thanks to the iPhone. This enables us to say that a small number of decisions and rare events have a major role in our current situation. Knowing when and how to exploit rare events is what makes the real difference.
There’s an old joke among pilots says that Their work is nothing but hours and hours of boredom interspersed with moments of absolute terror. The same applies to investing; your success as an investor depends on how you handle those moments of terror in your journey, not on the years in which you are in control.
Let’s take a simple example: the COVID-19 crisis shook most economies globally, impacting numerous companies and industries. Take the oil industry, for example, where prices fell to around $11 per barrel. Imagine buying 1000 barrels in this difficult time for $11 each — you want to know how much oil is worth now? It’s about $72.
In 2013, Warren Buffett said that he owned 400 to 500 in his lifetime, but he made most of his money from just 10 of them. When we tell the success story of a particular person, we forget that his decisions that led to his success are a small part among thousands of wrong decisions that did not bear fruit.
The topic of money involves many paradoxes, here’s one of them :
wealth is what you don’t see. If you see a Ferrari driving around, you might intuitively assume that the owner of the car is rich, even if you don’t pay much attention to him, but it’s not always the case. 61% of luxury cars on the streets are owned by people trying to appear wealthy, and this has been proven through a scientific study.
The person driving a $100,000 car may be rich, but the only data you have about their wealth is that they had over $100,000 before buying the car. or $100,0000 in debt -who knows , that’s all we know about people like this.
We tend to judge wealth based on what we see, as this is the information we have, but we cannot see people’s accounts, so we rely on their external appearance to measure financial success, and this is what appears through cars, houses, and Instagram photos. But the truth is that wealth is what you don’t see.
Wealth It’s the beautiful car you could have bought but you chose to keep the money instead of spending it for others’ opinions. Wealth is the financial assets you own, not the clothes you bought with money that should have been used for another asset. The only way to be wealthy is not to waste the money you have — it’s not just a method of accumulating wealth, but rather the definition of wealth itself.
Not losing money on trivial matters becomes a challenging decision when you have a lot of money.
This requires a lot of self-control but it creates a gap between what you can do and what you choose to do, and this accumulates to your advantage over time.
Of course there are rich people who spend a lot of money on things, but even in those cases, what we see is their affluence, not their wealth. We see the cars they chose to buy and maybe the school they selected for their children, but we don’t see the savings, retirement accounts, or investment portfolios. We see the homes they bought, not the homes they could have bought if they wanted.
This explains why it is so difficult for many to build wealth.
The world is full of people who appear modest but are actually wealthy, and those who seem rich but live on the brink of bankruptcy. Keep this in mind when judging others’ success and when you set your future goals.
But if wealth is what you don’t spend, what’s the point? Well, let me convince you with an alternative idea.
After achieving a certain level of income, people are divided into three groups:
those who save
those who don’t believe they can save
and those who don’t believe they need to save.
The simple-yet easily overlooked-idea here is that wealth-building has nothing to do with your income or investment returns but has a great relationship with the savings rate.
Let me tell you a short story:
In the 1970s, the world seemed to be running out of oil. The calculations were not difficult; the global economy used a lot of oil, even though the economy was growing, The available oil reserves couldn’t keep up with this growth.
Thankfully, the oil didn’t run out, not because we found more or because we got better at extracting it. The main reason we overcame the oil crisis was that we began building cars, factories, and homes that were more energy efficient than ever before.
The same applies to our money, saving money instead of spending it on useless things gives you endless choices for the future, giving you control over your time, a key to happiness.
Learning to be happy with less money creates a gap between what you have and what you want.
A high savings rate means that you are spending less than you can spend, and this means that your wealth grows more and more.
All you need is to control your “ego”. Every one of us needs necessities, and when your income increases, the ego begins to look at luxuries, beyond luxuries, which is an attempt to spend money to show people that you have money.
Money depends more on psychology than financial management. You can spend less if you desire fewer things, and you will want less things if you care less about what other people think of you, it’s a simple equation.
But do not overdo it by being rational without emotions. In fact, you should be reasonable, not rational.
A rational investor makes his decisions based on facts based on numbers, while an investor who relies on what is reasonable makes his decisions in a meeting room or when he is surrounded by co-workers who value him very much, or with his children whom he does not want to let down, or Even when he is judged by ridiculous but realistic rivals like his brother-in-law, his neighbor, or his own personal doubts.
Because in finance there can be things that may be technically correct, but that do not make sense in terms of context, are not realistic.
The 63 quintillion that we said Simons would have had if he had invested with the same strategy for 70 years are correct numbers to calculate. They are rational, but they have no connection to reality. They are not realistic at all.
This is the difference between being rational and being realistic.
It’s almost a badge of honor for investors to claim they are emotionless about their investments, because it sounds rational. The problem here is that investing in a promising company that you do not care about may make you enjoy when everything is going well, but when the tide ends and the ebb begins, you will suddenly lose in something that you do not care about. How cruel that would be, and you will decide to withdraw immediately, but If you are passionate about a company to begin with, this will help you keep going when things go wrong. This is what happened with Warren Buffett. He loves his stocks, and this is what you should do too.
But do not fall into the trap that most investors fall into:
Which is the over reliance on past data as an indication of future conditions in a field where innovation and change and the lifeblood of progress are at play.
Investing is not a hard science; it’s simply a huge group of people making imperfect decisions based on specific information about things that greatly affect their well-being, and which can make even smart people nervous, greedy and paranoid.
These feelings control most investors and traders, making it so difficult to predict what they will do in the future based on their past actions.
There is Two dangerous things happen when you rely too much on investment history as a guide to what will happen in the future:
The first is that you will overlook the extreme events that move the compass needle, events that impact the entire economy, such as the Great Depression, World War II, the dot-com bubble, and the housing market collapse. A handful of extreme events play a huge role as they affect many unrelated events in their aftermath.
What makes extreme events so easy to underestimate is how easy it is to underestimate how things accumulate.
Let’s take an example: The events of September 11th prompted the Federal Reserve to lower interest rates, helping fuel the housing bubble, leading to the financial crisis, which, in turn, weakened the job market. causing tens of millions to seek a college education, leading to student loans totaling $1.6 trillion with a default rate of 10.8%.
It’s the butterfly effect shaping the future.
This doesn’t mean we should use past surprises as a guide to the future, but rather acknowledge that we have no idea what will happen in the future.
The most important future economic events that move the needle more than others are the events about which history does not provide us with any evidence. They will be unprecedented events, and there when you can grow your wealth my friend.
The second point is that history can be misleading for the future, because it does not take into account ongoing changes. The more you look back, the more likely you are to examine a world whose rules no longer apply today.
This doesn’t mean we should ignore history when thinking about money; you just need to consider that the more you look into history, the more general the facts become.
conclusion :
The entire concept of this article revolves around two ideas: consumption and investment.
As we said, investment depends mainly on compound value — investing your money, receiving returns, taking those returns, and reinvesting them, creating a cycle that grows in value over time.
And Warren Buffett is a living example of this system. Warren Buffett is supposed to be the richest man on the planet, more than Elon Musk himself. He would have been like this if he had not donated half of his wealth approximately 20 years ago. Imagine donating half your wealth and still being on the list of the world’s richest people. This is because when Buffett was young, he used to sell newspapers and collect cents until he reached the value of a cheap stock and bought it.
How many times, my friend, have you and I wasted money on useless things? Anyway, we cannot go back in time, but we can teach our children. We can teach them to save the money they earn and invest it in small things, nurturing an investor’s mindset. Buffett took a long time to reach where he is, and even if you’re 30 or 40, you still have a good chance of becoming wealthy.
For example, if you had invested only $1,000 in Tesla in 2004, you would now have a quarter of a million dollars. But if you used compound interest over this period, you would be a millionaire. There are current opportunities you should just look for, and do not forget to take advantage of the events that we talked about. It’s very important.
So please my friend, don’t quit this article until you learn how to control your spending, know when and how to invest your income. Every income you get should be invested. If you take away this lesson from the article, it will be a great benefit that returns to you in millions.
Of course, you need to struggle a lot before reaching a state of prosperity. You must fight spending habits and transform them into investment habits. Just ask a simple question before buying anything: do I really need this thing, or do I just want it? If your answer is that you only want it and don’t need it, immediately invest the amount.
This way, you will develop the habit of investing. And Always remember that your emotions are the barrier between you and your future life. Follow your desires, and you’ll find yourself bankrupt. You will also destroy your psychology, Control your desires, and you’ll find yourself among the wealthy.
Wealth is habits and thoughts, poverty is habits and thoughts.
When you get rich but your habits are those of the poor, you’ll quickly lose that money. There are countless examples in our society, for example , the footballer Ronaldinho, who once represented millions of dollars but eventually couldn’t afford bail to leave jail. Why? Because he became rich but still had the habits of the poor.
It’s all about habits, and it’s something we can control. Learn how to spend money, and you’ll have taken the first step towards wealth.
As for investment, you need to learn. And as we said, It’s a simple science if your investment is long-term. Learn how to invest in different and diverse places, how to read stocks, plant your money in stable stocks, and that’s it. Consult, read, practice until you learn. And Always Remember that failure is necessary, but even if you lose money, you’ll gain knowledge. The knowledge that accumulated with Warren Buffett, making him rich.
Spending is in your hands; you decide whether the $500 in your possession will be spent or invested.
