Wednesday, April 16, 2014

three traits of the rich

The funniest thing I've noticed about rich people is how little their income has to do with their wealth. Mike Tyson earned $300 million during his career and went broke. An orphaned, unmarried administrative assistant died with millions in the bank. A lot of rich people aren't exceptionally talented at what they do. They just have quirks and habits that let them think differently about money than the rest of us.

Here are three I've noticed.

(1) They are (mostly pleasant) sociopaths

I'm convinced that nearly every rich person has the characteristics of a sociopath. Not in a cruel, soulless way. But sociopaths can disregard emotional events that cause normal people to worry and panic. Great investors can do that, too. They can watch stocks fall 50% and shrug their shoulders or see 10 million people lose their jobs and remain unshakably calm.

(2) They care about time periods most can't comprehend

There are four ways to invest:
  1. Unsuccessfully
  2. Long-term (varying degrees of success)
  3. Short term, successful due to luck
  4. Short term, successful due to manipulation/fraud
That's the complete list. Nos. 3 and 4 eventually become No. 1.

Long-term investing is the only sane choice. But it's unnatural. We're hardwired to grab immediate gains and avoid immediate threats. That's why we eat donuts and watch CNBC.

In August 1929, John Raskob wrote an article called "Everyone Ought to Be Rich." All you had to do was buy stocks and hold them for a long time, he wrote. Two months later, the market crashed. It fell 88% over the next four years. To this day, people cite Raskob's article as a sign of irrational hype. But was it? Anyone who bought stocks the day it hit the stands increased their wealth sixfold over the next 30 years, adjusted for inflation. Missing this is why everyone ought to be rich, but few are.

(3) They don't give a damn what you think of them

The price of being rich is really simple: You must live below your means.

But living below your means is hard. Most people want to be rich to impress other people. They do this by spending money, which is the surest way to have less of it.

Having the emotional backbone to drive an uglier car than you can afford, live in a smaller house you can afford, eat out less often than you can afford, and wear cheaper clothes than you can afford is rare. In my experience, less than 10% of people can do it in a meaningful way. It's the cost of being rich, and most people have no desire to pay the price.

"A miser grows rich by seeming poor," poet William Shenstone wrote. "An extravagant man grows poor by seeming rich." I don't think it's any more complicated than that.

-- Morgan Housel

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