[The Weekend Bulletin] #42: Making Money ≠ Creating Wealth
A digest of some interesting reading material from around the world-wide-web. Your weekly dose of multi-disciplinary reading.
The highlight of last week was this:
The second richest person on the planet baked a cake for the fourth richest person’s 90th birthday. Such humility!
There are a lot of things that both Bill and Warren share in common, the most interesting being their love for reading and their treatment of the wealth that they have amassed in their lifetime. There is something that we can all take away from these. And while we talk about reading in many different ways in this bulletin, this weekend I want to talk about something that these two have epitomised: the difference between money and wealth (h/t: Naval Ravikant for making that distinction public).
For a lot of us, investing is a means to create wealth. However, somewhere in this pursuit of the riches, we lose sight of the purpose. There comes a point when most of us start seeking money, not wealth. And while on the surface there is little difference between the two (making money is indeed essential for creating wealth), deep down, money and wealth are not the same thing.
Money is ephemeral; wealth is enduring
Making money is about returns; creating wealth is about sustaining returns over a long period
Money can be made with blind luck; creating wealth requires skill and the kind of luck that comes from preparation
Money can be made from a highly risk bet going right; remaining wealthy demands conservatism, consistency, and patience
Money is status; wealth is empowerment
It is through sheer coincidence that a lot (but not all) of the articles that I have read recently fit in to one or more of the above distinctions. So let’s dive in.
Section 1: Investing Wisdom
When we think of long term wealth, we usually think of the compounding equation [FV=PV*(1+r)^n]. We also have an unusually high focus on the rate of return (r), often ignoring the time (n) and the starting point (PV). While a lot is written about understanding the importance of the long term (n), this article touches upon the importance of the starting position (PV). It also ends with a very touching reminder that while we focus on amassing wealth, we should not forget about its distribution too (status vs empowerment).
Somewhere around 2014-15, a friend was pitching a PE fund that had delivered a 25% CAGR since the year 2000 to his client who rejected the investment quoting a 35% CAGR in his own listed stock portfolio. Little did the client realise that those outstanding returns were a once in ten year phenomenon, and that the next five years would yield him practically no returns. A similar lesson that the author of this article learnt while skiing - a rising tide lifts all boats.
He is often referred to as the Guru of the Gurus. He also developed the Earnings Power Value metric to determine the value of the firm without using the DCF model in his book released around the 2002. In this talk, Bruce Greenwald updates his concepts around earnings power and franchise value, especially in light of the last ten years (increasing importance of intangible assets) that will also form part of the second edition of his book to be released next month. He provides a good framework for valuing business and identifying if growth is value accretive or not.
[I quite enjoyed the talk and am in the process of transcribing it. Let me know if you want a copy by replying to this email]
Section 2: Mental Models & Behavioral Biases
When it comes to making money - as a tool to amass wealth - it’s easy to get lured by the upside. But we often forget, that making money is easy, preserving capital is tough. This is how we get lured into high flying returns of lesser known small and micro caps only to realise later that we lost our capital in the process (remember the 2018 crash in small cap stocks in India?). Most people learn the wrong lesson of avoiding small and micro cap stocks altogether, failing to comprehend a far simpler lesson: Avoiding stupidity is easier than seeking brilliance.
Here is how Morgan Housel puts it:
Section 3: Personal Development
This article would have served as a good starting point for the discussion on money vs wealth. Instead of differentiating between money and wealth, it talks about The Money Spectrum which serves as a good model for understanding how an individual moves through the different phases of having money:
In his ‘How to Get Rich Without Getting Lucky’ series (mentioned in the introduction above), Naval Ravikant says, "In 1,000 parallel universes, you want to be wealthy in 999 of them. You don’t want to be wealthy in the 50 of them where you got lucky. We want to factor luck out of it.” To be sure, he doesn’t mean that luck plays no role in life, but that you want to create your own luck by being extremely skilled at what you do. As knowledge workers, one of the ways that we can do this is by being a life long learner. In line with this thought, last week we looked at a very broad perspective on learning. This week, we follow-up with some specifics:
One of the biggest hurdles to learning is finding enough time. We all have the same 24 hours in a day. How, then, do some people manage to so much, while many of us struggle to even get routine work done? The answer lies in prioritising and time management. Here is an effective filter that you can use to prioritise your work and find more time to do things that matter the most.
It is a very well established fact that there is no smart person that doesn’t read. Reading, then, is a pre-requisite (a necessary but not sufficient condition) to becoming better. But how does one make time to read? We have answered that question in the past, but here is one more nudge.
Section 4: Trivia
Follow-up question on last week's trivia: interest rates matter in valuations. More than the absolute levels, their direction matters. They have had a one way journey for a fairly long time and have probably (hopefully!) hit the bottom.
Image Source: Macro Trends
This implies that over the long future, their direction should reverse. What will happen to equity valuations then? What will happen to your retirement plan then?
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That's it for this weekend folks. I hope you enjoyed this issue; let me know your thoughts/feedbacks by commenting below or hitting the reply button.
Have a wonderful week ahead!!
- Tejas Gutka
[September 05, 2020]