The most motivated and successful people take a problem, outline a solution, and relentlessly pursue it. This is a good model to achieve success. And following it creates momentum. It provides a sense of empowerment as obstacles are overcome. It is self-motivating as each milestone is achieved and each new one appears on the horizon.
The inherent flaw in this approach is that it assumes that the problem we are striving to solve will bring us the results we ultimately want. And we can lose that perspective during the relentless effort to make progress. We can fall into the trap of continuing to add new milestones in a misguided belief that if we can only reach them, we will achieve what we want.
We pursue wealth because we believe our problems will be solved by more money. And to be clear this is not the Communist Manifesto. I am not arguing against building financial assets. They can make a big difference in our lives. Having an emergency fund relieves the debilitating stress of living on the edge of poverty. Amassing wealth brings us material goods and experiences that bring us joy. But more than anything wealth buys time and freedom. Time to do what makes us happy. Freedom to dictate our own schedule and to walk away from jobs and situations that are harmful or make us unhappy.
In saying this I believe that after a certain level of financial security is established the thoughtless pursuit of a higher net worth is counterproductive. We shuffle through life attempting to add zeros to our bank accounts without pausing to ask ourselves if we are measuring financial success in the right way.
Not having ‘enough’
Kurt Vonnegut brought his good friend Joseph Heller to a party on Shelter Island off the coast of Long Island in New York. Shelter Island is a popular and expensive location for second homes of the wealthy. At the party Kurt Vonnegut commented that the hedge fund manager hosting the party made more money in a single day than Heller had ever earned from his hit novel Catch-22.
Joseph Heller turned to his friend and said, “Yes, but I have something he will never have – enough.”
This quote brings me back to one of those ordinary moments in life that we tend to mythologise into a defining occasion. What I am reminded of is the genesis of my financial philosophy.
I spent my high school years in a town named Greenwich which is a suburb outside of New York City. It was - and is - considered a desirable place to live and had the home prices to match. After I graduated Uni and started working, I had to commute to New York from my parents’ house one day. I found myself standing on the freezing cold train platform at 6am glancing around at my fellow commuters.
They stomped their feet to stay warm and prepared to charge onto the always crowded train in the hopes of finding a seat for the 40-minute ride into Grand Central Station. This was likely followed by a 20-minute subway ride to Wall Street.
I couldn’t help but think that the men and women on that platform had ‘made it’ in every conventional sense. They likely lived in expensive houses and had all the trappings of wealth along with the requisite high paying jobs needed to support that lifestyle.
The pathway those men and women took to that platform was probably similar. They worked hard to earn promotions and higher salaries. The higher salaries facilitated increased borrowing power. They financed a starter home and a car. Soon they had a bigger home in a better suburb with a nicer car in the driveway. Eventually they ended up in Greenwich.
Each step on this ladder meant more obligations. My interpretation of my brief time on that train platform and the myth I created in my mind was that these people were sacrificing freedom by not having ‘enough’. This may have been their dream and I respect that. My caricature of people I don’t know may come across as critical. But we can just as easily be motivated by what we don't want to become as what we do. And I wanted to follow a different pathway.
I saw the trappings of success simply as traps that kept those people coming back to that platform day after day. Buying the material possessions that denoted success including the big mortgage just seemed like a pathway to lock me into a life that I didn’t want.
What I wanted was freedom. And I wanted to convert my labour into financial assets that enabled that freedom.
How does not having 'enough' impact our investing approach?
Not having ‘enough’ means we haven’t properly defined our goals. And when it comes to investing our goals may be expressed in financial terms but they need to be aligned with our life goals.
I speak to a lot of investors. If I ask them about their goals, I repeatedly hear the same thing. They tell me they want to be rich. They tell me they want the most money possible. Fair enough. There are few people that would rather have less money than more money.
The issue is that when your goal is to have the most money possible it starts to dictate your actions. If you want the most money possible you should always be in the best investments. This mindset is counterproductive.
A goal of having the most money possible makes it more likely you panic when markets drop. It makes it more likely you fall victim to greed when markets surge.
It means you trade frequently because you are always trying to position your portfolio perfectly. It means you fall prey to recency bias and chase performance.
For most people the results are predictable. Returns are lower. Tax outcomes are worse. Transaction costs are higher. And ultimately this pursuit of the most money possible takes people to a very different outcome.
The larger issue is that this view of financial success drives the way many investors approach money. It ignores the true value of money as an enabler of security and happiness. Money and wealth are a means to an end. Treating it that way can change your relationship with money and the decision-making process for your own finances.
Why build wealth?
The real question for each of us is why we build wealth in the first place. And I had trouble articulating this for a long time. I just saw the pathway others pursued and I knew it wasn’t for me. Eventually I came to the philosophy that continues to guide my own investing and view of my finances.
Many investors tend to think the biggest problem is finding the right investments to buy. This leads people down strange paths. They stare at stock charts trying to manifest the direction of prices. They sell in May and go away. They nervously await signs of a Santa Claus rally with more excitement than a kid on Christmas morning. They search for clues in each utterance by a central banker. In short, they do everything possible to make sense of short-term randomness.
I’ve developed a different view. My view is not for everyone. That is because each of us is different. What isn't different is the need to align our investing and financial approach to the lives we want. Our financial choices should enable our lives. Not dictate them.
My investing principals are the following.
- My own vision of financial success is using my financial resources to enable freedom. To me this is freedom from worry and freedom from the burdens of committing time and efforts to things that aren’t important to me - it is the freedom of choice. This is not synonymous with growing my net worth.
- I focus on growing the portion of my salary going to discretionary spending. I don’t use salary increases to fund more fixed obligations and instead pay for experiences. I actively battle against lifestyle creep that doesn’t bring me joy and simply resets my expectations for a life I don’t want. This gives me choice over my spending which to me is true independence.
- I use my savings and investments to provide cash flow. The more cash coming into my bank account the more options I have. Those options provide freedom. And I spend some of this money now on things I love like travel. This is why I’m an income investor and the value of my portfolio is a secondary concern. This has made me a better investor. I don’t chase each shiny new ‘can’t miss’ investment. Building an income stream takes patience as the incremental impacts of savings, dividend reinvestment and dividend increases work their magic. It keeps me focused on the long-term, tax minimisation and low transaction costs.
I understand that this concept is different from what we are typically told. We are told to focus on our net worth. To use debt as an enabler of acquiring more assets. To find tax minimisation strategies involving negative gearing to sacrifice current cash flow for a lower tax rate. To focus on growth investing when we are young and only worry about income when we are retired.
We are told someday this will pay off. Someday we will be able to sell our assets to fund the experiences we really want now. That when we sell those assets, we will still be young enough to enjoy the experiences they buy. And on we trudge, buffeted by the headwinds, towards an unappraised mirage of financial success.
Mark Lamonica is Director - Editorial and Content at Morningstar.