You can only become truly accomplished at something you love. Don’t make money your goal. Instead, pursue the things you love doing and then do them so well that people can’t take their eyes off you.
I wish to thank all my readers for appreciating my last post, the first one of 2021. The post had given a blueprint to review 2020 in 11 simple steps and it really resonated with the readers. I have a firm belief that what we don’t quantify never gets achieved and hence firm and tangible goals are a must for success in life. Tangible goals also give you a goalpost to aim at and if you miss it you can exactly work out how much was the difference between the hit and the miss. This exactitude gives you a clear direction towards course-correction. Please go ahead and read this post and take actions, the year has just begun. Let us now start on a very interesting journey which I dare say is an aspiration for all of us- to be wealthy.
Is it a must that one has to be born with a silver spoon to become a millionaire (we are talking of U.S. dollar millionaires here) or this feat can be achieved by an average middle-class investor also within one generation? This question has been answered very succinctly in the brilliant book, “The Millionaire Next Door” written by Thomas J. Stanley and William D. Danko, in 1996. The authors wrote this book after their extensive research on American millionaires spanning many years. The research brought out many surprising conclusions which we, as common middle-class persons, would do well to emulate, if we too wish to become a millionaire in one generation. Let me summarize the main points from the book to you in a few lessons- so, here we go.
- How does a Millionaire look?
“These people cannot be millionaires! They don’t look like millionaires, they don’t dress like millionaires, they don’t eat like millionaires, they don’t act like millionaires—they don’t even have millionaire names. Where are the millionaires who look like millionaires?”
Whenever we think of millionaires, images of Vijay Mallya and Lalit Modi flash before our eyes. The flamboyant, globetrotting, media and celebrity surrounded cool dudes who own Private Jets and go on vacations to exotic Caribbean Islands, with their extended family in tow, are to us, the quintessential millionaires. The nondescript middle-class person, who lives in our neighbourhood, minds his own business, drives a five-year-old Wagon R or such like cars, dresses up in decent but tasteful clothes and goes on annual vacations in “India only”, can’t be a millionaire? Is that so? But surprisingly, as per the authors, most of the American millionaires were actually found to be like our routine middle-class neighbours.
But then, how come they amassed such humungous amounts of wealth, that too within one generation i.e. without inheritance? Mostly, by living well within their means and minding their own business. Let’s elaborate further.
- Common Traits of Millionaires
The buzzword in investing today is “Equity Investing” be it in individual stocks, equity mutual funds, index funds, ETF et al. It is considered as the sure and only road to riches. But what the authors discovered was contrary to this belief.
“Not at any time during the past thirty years have I found that the typical millionaire had more than 30 percent of his wealth invested in publicly traded stocks. More often it is in the low-to-mid-20-per cent range.”
There is no contradiction in this finding though- all it means is that no matter what is your asset allocation, you have to stick with it through thick and thin based on the goal for which you are investing, with Rebalancing at periodic intervals. Over time, the magic of compounding will reward a disciplined investor. Your Asset Allocation i.e. the split between your equity and debt allocation would vary based on the goal you are pursuing, So, if you wish to buy a car after 3-4 years, you might be in 100% debt investments; if you are accumulating for your child’s education after 15 years you might be 70% in equity and 30% in debt investments. Remember, there is NEVER a case to be in 100% equity or debt investments (for your long-term goals)- you can read the rationale in both my books.
Secondly, these millionaires very rarely indulged in direct stock picking, instead, investing in stocks via the mutual fund route was their preferred method. This topic evokes very sharp responses from many who feel that the way to accumulate real wealth is only through direct stock investing. Let me put forth some statistics to support their case. The returns of the few multi-bagger stocks over the last five years are as under-
- Asian Paints Ltd. 189%
- Reliance Industries Ltd. 197%
- Bata India Ltd. 172%
- HDFC Bank 221%
- Kotak Mahindra Bank 245%
Just imagine the wealth you could accumulate if you were invested in these stocks five years back. But that’s the problem, how do you know five years in advance, which stock is going to turn a multi-bagger? Hindsight is always 6/6 and can land you with the following duds too (last five years returns again.)
- Cox and Kings Minus 99%
- Reliance Communications Minus 97.5%
- Sintex Industries Minus 94.6%
- Videocon Industries Minus 94.1%
- Yes Bank Minus 87%
Wealth destroyers, won’t you agree? This is the problem with direct stock investing. It is a subtle skill which needs to be honed over many years by a method of trial and error. You are searching for the needle(s) (the multi-bagger stocks) within the haystack (a stock universe of thousands of stocks whose price fluctuates hundreds of times in a day). Do you have the time and energy to do it alongside your job or profession? If you have, well, go ahead and try. I would instead advise a simpler method- invest in the haystack itself. Index Mutual Funds, investing in all the 30-stocks of the Sensex of the 50-stocks of Nifty, is the way to go. I know you want to find out how these Indices have performed over the last five years? Here we go-
- Sensex 92%
- Nifty 89%
Even if you had invested in a regular Mutual fund you wouldn’t have been too badly off. Given below are the 5-year performance of the mutual funds of various hues. Remember, if you are growing at a CAGR of 16-18% you are doubling your money in 4-4.5 years. The power of compounding is working overtime to create wealth for you.
- Axis Bluechip (Large Cap) 17.62%
- Quant Active fund (Mid-cap) 16.32%
- SBI Small-cap fund 18.55%
- PPFAS Long Term Equity fund (Multi-cap) 15.94%
Most of the millionaires (around two-third) were self-employed although they consisted of only 20% of the population. Risk and Reward paradigm holds true here as well as in other aspects of life. Technology offers today the tools to become self-employed despite holding a regular job. People are earning handsomely through royalties of their intellectual property (books, songs etc.), blogging, and YouTube/Instagram activities. Think out of the box- the sky is the limit.
Nearly 97% of millionaires had their own homes and all lived well below their means. Nearly all wore inexpensive suits and drove old model cars. I have highlighted these points in earlier posts, please revisit them to learn Spending Investing (SI) balance and budgeting. In this book, the authors have provided real-life examples of common middle-class persons who became millionaires following these basic tenets. To put a figure to their SI balance, all saved (read invested) between 15% and 20% of their earned income.
Nearly all these millionaires had accumulated enough money to live without working for at least ten years. Tongues firmly in cheek, the authors refer to this fund as “Go to Hell fund”. Wouldn’t it be liberating for us also to get this fund fastest so that we can pursue our passions in life without bothering about next paycheck?
All were very particular about the education of their children and grandchildren on which they spent heavily. However, please be notified that this expenditure was always well planned and catered for by prudent investing and was not met through education loans etc.
- What is being Wealthy?
“We do not define wealthy, affluent, or rich in terms of material possessions. Many people who display a high-consumption lifestyle have little or no investments, appreciable assets, income-producing assets, common stocks, bonds, private businesses, oil/gas rights, or timberland. Conversely, those people whom we define as being wealthy get much more pleasure from owning substantial amounts of appreciable assets than from displaying a high-consumption lifestyle.”
This startlingly obvious and yet ignored precept is worth its weight in gold. Our ancient saying of “Tete paon pasariye jeti lambi saur” or “cut your coat according to your cloth” seems to have been forgotten in our high consumption and showy lifestyle. If we have to accumulate our “go to hell fund” faster, we need to start with a “Breathing Fund” as a first step (we have discussed this concept in earlier posts). We also need to eschew ostentatious lifestyles. What our neighbour drives, eats or wears should be none of our concern. We should have our own clear worldview and take all our financial decisions accordingly.
The authors have defined wealth as one’s “Net Worth” which is the current value of one’s assets less liabilities. Robert Kiyosaki, the author of “Rich Dad Poor Dad” has a very interesting take on what is wealth? He defines it as, “Wealth is a person’s ability to survive so many numbers of days forward— or if I stopped working today, how long could I survive?”
This point emphasizes the value of “liquidity” in your total Net Worth meaning if required, how much money you can muster at short notice for your essential needs. Let’s say, 80% of your net worth consists of your house and car and you suddenly need money for a financial emergency. How soon and at what price will you be able to sell your house or car? It may be weeks or even months (especially for the house) before you can find a buyer who is not going to take advantage of your desperate situation.
The endeavour for us should always be to keep increasing our assets as they are our “cash flow generators” and will keep on fueling us in financially lean times- an ability that our liabilities like Smartphone or car sadly lack.
“The rich focus on their asset columns while everyone else focuses on their income statements.”
For this book, the authors studied the people with a Net Worth more than $ 1 million (approximately Rs 6.6-6.7 crore). Mind you, these people were millionaires more than twenty years back, when the purchasing power or value of Dollar was much greater. Their percentage was very small- only about 3.5% of the total American population and mostly all were first-generation rich with modest backgrounds. The tenets to accumulate wealth which they followed must be scrupulously followed by us to achieve their financial outcomes, right?
A very obvious question would be- is there a yardstick of wealth that one can derive from this wonderful research? Having such a yardstick will concretize the nebulous goal of “being wealthy” for all of us. Fortunately, there is one and we will tackle that in the concluding part of this series next week.