Transcription
[Music] Today, we discuss the algebra of wealth. We attempt to answer one key question: how to get rich. But first, the fine print: there's more than just one algorithm; there are many paths that people have taken. Jay-Z, Warren Buffett, and Vladimir Putin all took different routes.
Anyway, I'm a self-made entrepreneur, and I'm going to share with you what has worked for me, or mostly worked for me, and what I share with my students. The circumstances of your birth, unfortunately, make a big difference. A lot of your success and your failure isn't your fault. And there's a virus infecting many people in my generation, mostly in technology, who conflate luck with talent. As a white male growing up in the USA in the 70s and 80s, I had advantages many people did not. I received a near-free education and had the luck to come of professional age in the era of the internet.
So what is the algebra of wealth, from my experience? It comes down to this formula: focus plus the product of stoicism, time, and diversification. Let's break these down, starting with focus. People mistake a lack of focus for a lack of talent. Talent and intelligence are correlated with wealth, but aren't as powerful a signal of your future success as determination and focus. Focusing on finding something you're great at—something you can do better than most other people, something that people will pay you for—it may not be your passion, but getting great at something and the accoutrements accompanying that greatness will make you passionate about whatever it is. And then focus on positioning yourself for success. That means getting certified and getting to a city, especially while you're young, so you can meet and play against the best in your league. Another way to position yourself for success: find industries and themes that are poised for growth. For the past two decades, I've ridden the e-commerce wave. I started an e-commerce firm, started another firm advising big firms on their e-commerce strategy, and my biggest stock market holding has been Amazon.
So what are the next big waves of opportunity? We had globalization, then we had digitization, and we are on the precipice of the third big wave: dispersion. The dispersion of health care, work, education, and fintech are all causing tidal waves of change. Those waves, those waves are the ones you want to paddle out to and get in front of. The second thing you should focus on: investing in the right relationships. While this applies to business relationships, the single most important economic decision you will ever make is your partner. Research shows that married individuals experience per-person net worth increases of 77 percent greater than their single counterparts. However, however, marriage is betting half your future net worth that you'll be partners forever, meaning divorce is costly. And the best way to hold on to our relationship is not to keep score; bring forgiveness, generosity, and engagement, or put another way: continue to show up.
The next part of the equation is stoicism. One of the chief tasks of a stoic is to determine what is under his or her control and what is not under his or her control. Living below your means is the clearest blue-flame path to financial freedom, because it isn't your salary that makes you rich; it's your spending habits. Any fool can make money; it's more difficult to hold on to it. As a kid, I thought being rich was having a BMW 2002, Topsiders, and Varney's. #awesome. But as an adult, I know better, or at least I know better now. Dispel the myth that you need to be a billionaire to be rich. You don't need to be a hero. I know partners at investment banks that earn millions every year; however, between their ex-wife, alimony, homes in the Hamptons, and their fabulous lifestyle, they spend every penny of it. They are poor. Then there's my dad; he earns almost fifty thousand dollars a year from his Royal Navy pension and Social Security and spends forty thousand dollars. He is rich. The most powerful forward-looking indicator of your financial freedom is not how much you earn, but how much you save. Stoics also embody good character. Succeeding in life is a lot easier if people want you to succeed. Many of us have a cartoon image of rich people being Monty Burns; the reality, at least in my experience, is much different. The other Stoic virtue relevant to wealth: temperance and discipline. In this age of superabundance, your instincts can lead you astray; don't let them. The temptations for consumption are everywhere, as industrial production and processing power have created a ubiquitous doom scroll. An upgrade from economy to premium economy to business class to first class to a private jet can all seem like an investment in yourself; they are not. Nor is watching TikTok videos for hours, constantly checking Twitter, Instagram, or Facebook for affirmation, or looking at the price of Bitcoin seven times a day on Coinbase. We crave dopamine for instinctual reasons, but now it's everywhere, and we have trouble modulating. Modulate. Show discipline. There's a thick line between investment and consumption; one enhances your economic security, and the other gives you a dopamine rush. If you're investing to learn or for dopamine because it's fun, that's fine; there's nothing wrong with it, but recognize, recognize both of those cost money. I love to gamble—no joke. When I'm in Vegas, I put on a kilt and a blazer and I head down with a thousand bucks that I expect to lose—the Golden Nugget 7.99 all-you-can-eat buffet and Carrot Top, a deeply, deeply misunderstood artist, obviously, for a thousand, who is awesome. In Vegas, who is the dog? Another thing, another thing: anyone that tells you to be prepared to lose it all isn't talking about investing; they're talking about gambling. If you're serious about investing, you should not be prepared nor willing to lose it all. If you invested in low-cost index funds a decade ago, you would have outperformed 90 percent of alternative investment funds, and if you hold a basket of diversified stocks for at least 20 years, nobody has ever lost money.
The third element of our equation: time. In the long term, time is your ally; in the short term, it's your enemy. The amount of time we have is completely out of our control; do not squander it. Time is the one thing you should not be generous with. Invest early and make it a habit. The math on compound interest doesn't lie; starting early with a little can be better than starting a little later with a lot. Let's take two people; both invest $4,000 a year. Person A starts at 20 but stops investing at 40. Person B starts at 40 but ends at 65. Earning 10% a year, Person A ends up with over 600 percent more than Person B, thanks to decades of additional compounding. Remember, it's time in the market, not timing the market, that counts. See above: compound interest. Lastly, lastly, diversify. In investing, diversification is your Kevlar and ensures that no one bad decision is a fatal blow. Bulletproof vests don't stop you from getting shot or stop the pain; they just stop the bullets from killing you. True story: I bought Netflix stock at twelve dollars a share. That's the good news; it's currently at over five hundred and fifty dollars a share. That makes me a genius, right? Wrong. Why? I sold it at ten dollars a share six months after I purchased it to capture the tax loss at the end of the year and never bought back in. It was a mistake. It hit the Kevlar, but it wasn't fatal. I was diversified, and that diversification continued to pull me forward. One of my first startups was called Red Envelope. When it failed, I went from shopping for private jets one morning to losing 70% of my wealth in what felt like about two weeks—maybe it was three, but it happened fast. Also, what really cost me? I didn't invest enough in my marriage, and it cost me 60 percent of my net worth. However, however, I learned and got real. For me, when 13 years ago my first son had the poor judgment to come rotating out of my girlfriend, I embraced this equation, invested between 10 and 30 percent of everything I've made since, didn't invest in anything I didn't want to hold for at least a decade, and I never put more than 10 percent of my net worth in any one thing. Today, that number is 5%. That doesn't mean I don't participate in unexpected opportunities that offer asymmetric upside; I do. I just don't bet the ranch on them. You can still take bullets; you don't need to be a hero; just make sure they never kill you.
To summarize: focus plus the product of stoicism, time, and diversification. Financial and emotional security come down to discipline, generosity, and investing every damn day. So to answer the questions we all ask ourselves: how do we build a life of love? How do we develop economic security? How do we get rich? The answer [Music] slowly. We'll see you next week. [Music] You