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How ordinary investors achieve great wealth

Updated: Feb 8, 2021

I've been on a stretch reading a bunch of investment books recently. This latest one provided some interesting insights.

I love reading about how ordinary people created extraordinary wealth and the sort of stories that the average person can relate to. It's not as much fun reading how some rich kid with the trust fund has become a multimillionaire or even how someone with incredibly astute investment acumen like Warren Buffett has become a multi billionaire. The reality is very few of us have parents that have left us multimillion dollar trust funds or incredible run rates of return on invested capital in excess of 20% over multi decades. That's just not very realistic.

It's much more interesting and relatable to hear how someone has left an estate of $4 million to the local school or how a widow willed an $8 million estate when she died.

Along the same lines, I happen to read a book recently titled "Ordinary people, extraordinary wealth" by Ric Edelman. This book includes profiles of thousand of clients of the financial planning firm that could manage to achieve some measure of long-term wealth. Admittedly the book is a little outdated but it still contains some interesting insight. I'm going to dive into a few of the observations that struck a chord with me.

Don't pay off your mortgage

While I now understand the virtues of keeping some measure of mortgage debt long time, it took me some time to get comfortable with the fact of keeping a meaningful amount of debt in place while investing cash flow that would've otherwise gone to pay down that debt into more productive assets. That's something that I can relate to now with interest rates low and locking in that low cost of debt for a long time.

However, that wasn't always the case. Culturally, I have a major aversion to retaining any kind of debt and have always had a desire to have that paid down. Edelman's book emphasized that one of the key principal to long-term wealth is maintaining hefty mortgage by maximizing your interest deduction and therefore after-tax position and using free cash flow to generate a productive return for other assets.

Avoid active money management

Active money management has almost become a dirty word dirty expression over these past few years. It seems that there are more and more stories in the media about how dismal active money manager financial returns are net of fees and how 80% of money managers typically failed to beat their respective indexes. Frankly that's a view I've always held.

However this is another point that came through in the book that the majority of the investors profile typically stuck to some combination of passively managed index funds and avoided all active management when you consider the financial returns of active managers and the fees that are charged. It's not hard to understand why this is the case.

Limited investment turnover

This is probably my favorite point in the whole book. I've long believed that we as investors can be our own worst enemy as far as becoming too impatient too soon. Wanting to constantly feel with and make changes to your portfolio is like handling a bar of soap too much. Eventually over time the bar of soap would whittle down into nothing if touched too many times. The most successful investors here typically only turned over their portfolios once every 3 to 5 years and that too it would only be setting select assets within their portfolios. The grievant punched during this period of time. This is a lesson that I have to remind myself on a regular basis and it was good to get some additional reinforcement from this book.

In fact, the investors were profiled but typically so dispassionate about their investments that they very rarely bothered to check the values of their holdings at regular intervals. Electronic trading accounts and real-time access to stock quotes have done many investors a disservice by making it far too easy to move in and out of a position. We are not trading businesses like we're going to the supermarket to buy groceries. It's helpful to remind ourselves that successful investors very rarely trade positions let alone check pricing on those positions.

Limited attention to media

The observation of paying limited attention to the financial press was a very interesting one as well. I think part of the reason that investor turnover has increased so significantly in addition to the ease of making trading decisions is the 24 x 7 cycle that were exposed to in the financial press.

It's hard to escape the blow-by-blow details on the number of stories of companies stock price movements, economic activity, interest rates etc that bombard you on a regular basis.

What was unique about the successful investors was that they rarely gave new stories attention, and if they did it was more for curiosity than anything else. More often than not the financial news was typically just used as information and not as recommendations. Also, it wasn't used as information that any investors acted on and more often than not was just entertainment rather than something to be taken seriously.

This provided a very useful reminder to me in the current period that we see ourselves in that constant fear of poor economic activity, pandemic concerns, economies in recession that the number of negative news flow stories at a macro level let alone on a company specific level would be more than enough to make most people fearful and panicky.

The fact of the matter is high-quality businesses continue doing exactly what it is that they have been doing irrespective of economic events or the new flow around them.

As investors we would do well to heed this advice also.

On balance, I really enjoyed reading Edelman's book. While the insights themselves were fairly basic, it provided a refreshing reminder of all the basic blocking and tackling that one has to do to become a successful investor.

Sometimes we lose sight of the basics and make investing more complicated than it needs to be. This book was a very useful reminder of why it's important not to lose sight of the basics.

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