Wealth-Building Advice

Intro

One thing my dad always said was, “It is not how much money you make; it is how you spend it!” I always remember this advice, and it has served me well.  We can gain a lot from simple advice from successful people. The following is a collection of truisms from some highly successful people.

Stocks build wealth

Bill Miller. Manager, Legg Mason Value Trust

Miller talks about, as a child, seeing his father reading the financial pages and asking him what they were. His father said, "These are stocks." so Miller asked, "What's a stock?" His father said, "This symbol represents a company and this 'plus .25' means that if you owned one share of this company yesterday, today you have 25¢ more than you had yesterday." Miller says that what he earned from the lesson was that he could go to sleep, wake up, and have 25¢ more without having done any work. Miller says he has since learned that while you may earn the market rate of return by doing no work, to earn an excess rate of return you certainly have to do some work.

Do what you love

Dean Kamen. Segway inventor

Kamen’s father was an artist who loved what he did and would sit at his board 12 hours a day. When Kamen asked him why other fathers had time after work to play ball or sit around, while he was always working his father said "Those fathers are doctors, lawyers, and bankers. When they come home, all they want to do is their hobby. My work and my hobby are the same. Find work in something you love and it won't feel like work."

Think antisocially

Robert Shiller Professor of Economics, Yale University

Shiller says that a teacher in graduate school at MIT, Charles Poor Kindleberger, first convinced him of the social process that drives much of what goes on in speculative markets. One needs to think antisocially to excel in investing, to resist the patterns of thinking that seem mysteriously to arrive simultaneously in the minds of millions of people around the world.

People do not trust their judgment but go along with the crowd, even when they can see the truth. In a world populated with such people, there are investment opportunities for people who make the effort and do the work.

Know where your money goes

Derek Jeter. Shortstop, New York Yankees

Even if you have someone who handles your finances for you, you should always be involved in the process.

Can't get rich using earned income

Melody Hobson. President, Ariel Investments

Look at all the great wealthy families, from Carnegie to Rockefeller, it was never how much they made at work that made them wealthy—it was their investments. That made me shift from thinking about a paycheck to thinking about building equity and long-term wealth. Instead of a raise, I ask for more stock.

Leave your money alone

Susan Byrne. Founder, chairman, and chief investment officer, Westwood Management

Only rebalance your investments once a year. It's simple, but it's saved me lots of heartaches. Rebalance everything annually and then leave it alone no matter how the market goes. 

Be frugal but not stingy

Meir Statman. Professor of Finance, Leavey School of Business, Santa Clara University

Statman says his parents taught him to, "Use money well, but do not waste it." so he grew up with the sense that money is there to do good things, to support your family and others. "The Millionaire Next Door" describes millionaires who never buy a new car because its value goes down substantially after two years and so on. However, Statman says he buys new cars, after checking around to get the best price. He says that the idea that he should live like a pauper even when he has the means to live better does not make any sense to him. 

Swear off debt

Elizabeth Gilbert. Author, "Eat, Pray, Love"

Gilbert says her father taught her that she should never under any circumstances go into debt. He told her that, "Borrowing money is like wetting your bed in the middle of the night. At first, all you feel is warmth and release. But very, very quickly comes the awful, cold discomfort of reality."

To excel at something

Ed Slott. Author of "The Retirement Savings Time Bomb...and How to Diffuse It"

Slott’s father used to say, "If you really want to be good at something, you have to bathe yourself in it." He says his father taught him that the best investment you can ever make is in your professional education.

Create your own opportunities

Bobbi Brown. Founder and CEO, Bobbi Brown Cosmetics

When first starting as a freelance makeup artist, Brown worried that she didn't have enough money. Her father told her to figure out a way to make more money. So she started looking through the Yellow Pages and calling agencies, magazines, photographers—anyone she could offer her services to, sometimes working for free until she proved herself. Soon, she was getting regular calls to do makeup. She realized that it was her job to find more opportunities. 

Ignore the noise

Abby Joseph Cohen. Senior investment strategist, Goldman Sachs

Financial markets are, by nature, volatile and messy. Successful long-term investing emphasizes the fundamental underpinnings of the economy and companies. These building blocks rarely shift quickly, although market prices may change frequently and dramatically during a single trading session.

Wise investors make their decisions based on a few essential elements and are not easily deterred by market gyrations. But wise investors are also willing to adjust their views when the critical variables shift or do not play out as expected.

Advice from Vanderbilt

John Steele Gordon. Author, "An Empire of Wealth: The Epic History of American Economic Power"

Commodore Vanderbilt's advice to a young, earnest reporter was, "Don't buy anything you don't want or sell anything you ain't got." Vanderbilt was warning against speculation; he followed his own advice and died the richest self-made man in the world.

Money doesn't make you happy

Craig Newmark. Founder, Craigslist

Material stuff won't make you happy was the message Newmark was taught at Hebrew school as a child. Now Newmark is happy with a tiny fraction of the wealth he could have.

Advice from Rodney Dangerfield

Christopher J. Ailman. Chief Investment Officer, California State Teachers' Retirement System

Al Czervik, played by Rodney Dangerfield, in the movie "Caddyshack," gets a call on the golf course. "Hello. It's my broker. What? Then buy, buy, buy! Oh, everyone's buying. Then sell, sell, sell!"

From Al, Ailman learned to not follow the herd, they are generally wrong and late. If everyone wants to buy, it's probably the top. If everyone is heading for the exit, it's definitely the bottom. 

Advice from Horace

John Bogle. Founder, Vanguard

The Roman poet Horace once said, "Whoever cultivates the Golden Mean avoids both the poverty of a hovel and the envy of a palace." Bogle uses the idea of the Golden Mean in allocating funds in his balanced funds. Bogle thinks that asset allocation is the most important decision investors must make. It helps keep our counterproductive emotions out of the picture, assuring us of some profits when stocks rise and some protection when they fall. It also enables you to "stay the course" through thick and thin.

Don't get too good at the wrong stuff

Timothy Ferriss. Author, "The Four-Hour Workweek"

Ferriss says that Professor Ed Zschau at Princeton University gave him a short but powerful piece of advice after he had volunteered for the second time to clean erasers and place name placards on desks before class.

He said with a smile, "Don't get too good at the little things" and explained that if you excel at the menial tasks, those are the responsibilities people will associate you with and give you. Get noticed for doing things that help the big picture, not for fetching coffee, and your financial picture will grow just as fast as your reputation.

Live within your means

Olivia S. Mitchell. Director, Boettner Center for Pensions and Retirement Research, The Wharton School

Mitchell says her parents taught her to, "Save your money first and get used to living on what's left over." She says the advice has served her well throughout her life.

You can't reliably beat the market

William Bernstein. Author, "The Four Pillars of Investing"

"Over 90% of performance is due to noise," uttered over Chinese food by Clifford Asness. Superior manager returns are almost always the result of chance, not skill, and that trying to find the next great stock is a chump's game. 

Take risks when you can

Chris Larsen. Founder, E-Loan.com, and Prosper.com

Jim Collins, who wrote "Built to Last" and was an M.B.A. professor at Stanford taught his students to "Cut the lifeboats." He told students, "You're young. You can fail two or three times, even lose all your money two or three times, and you'll be just fine. Taking that risk puts you in the path of wealth."

Tap the power of compounding

Robert Frank. Professor of management and economics, Cornell University; author, "The Economic Naturalist"

Frank says his grade school teacher asked the class to imagine that we put one paramecium on one square of a checkerboard and then it had two daughters that occupied the second square, and the two daughters each had two daughters who occupied the third square, and so on. How many would you have by the time you got to the 64th square?

A lot. If you lined up all the paramecia end to end, they would reach the sun and back 6,000 times over. That lesson easily translated into money. A small amount of money invested today will be a lot of money in 50 years.

You can't fight the market, so join it

Laurence B. Siegel. Director of Research, the Ford Foundation

In the 1970s when Siegel got his M.B.A. everyone was teaching the efficient-market hypothesis: the theory that it's impossible to outperform the market regularly because existing prices reflect all the information that's presently known about an asset. If you outperform, it's generally because of luck.

Siegel said his school experiences taught him to buy index funds. You can't control market risks, but you can control costs.

Don't save too much

Steven Levitt. Author, "Freakonomics"

Salary rises steadily over time, as do outside opportunities. The right reason to save is so you can even out your consumption. When times are good, you should save, and when times are bad, borrow. 

Buy low, sell high

David Herro. Manager, Oakmark International

Herro says over 30 years ago a stockbroker told him never to forget the cardinal rule of investing: Buy low and sell high. Today Herro relies on a spin-off of that rule: Buy good-quality businesses at low prices, even if it's counter to the crowd, and sell high, even if what you're selling is in vogue.

It's hard to exploit a trend

Gus Sauter. Managing director and chief investment officer, Vanguard

Therefore, index investing is a great way to gain exposure to the marketplace. If you think investments are going to do something within a certain time frame, double that time frame. It could be anything from growth stocks outperforming value stocks to the dollar strengthening. That kind of advice gives you a dose of humility: It acknowledges that trying to exploit a trend is very difficult, even if you're right about it, because your timing may be all off.

Know what risk you are taking

Dan Fuss. Manager, Loomis Sayles Bond fund

Know the specific risk that you're taking with a particular investment. If you really, really know your companies, you have a phenomenal advantage, particularly in markets where you get rapid movements up and down that aren't related to individual companies.

Performance is random

Nassim Nicholas Taleb. Author, "The Black Swan: The Impact of the Highly Improbable"

Markets have princes, but they never have kings. Nobody's thoughtful enough to make it for long without falling on his face; things change all the time. Most of the successes you see are just the product of luck; most market performance is random. 

Stick with what you know

Richard Weiss. Managing director and senior portfolio manager, Wells Capital Management

If you know little about a company, shy away from it and stick with companies you really know about.

You don't know more than the market knows

David Laibson. Professor of Economics, Harvard University

It's easy to trick yourself into thinking you can outplay the market. You might outplay it for a while, but it will get you in the end.

The less you pay, the more you keep

Burton Malkiel, Author, "A Random Walk Down Wall Street"

It's hard to be certain of anything in uncertain financial markets. But Malkiel feels very confident about one piece of advice: Minimize your investment expenses. The less you pay in mutual fund fees, brokerage costs, sales fees, and taxes, the greater your net return.

Learned from Ben Graham

Jean-Marie Eveillard, Manager, First Eagle Funds

Benjamin Graham's book, "The Intelligent Investor," has three lessons. The first is humility, that the future is uncertain. There are people on Wall Street who will predict the Dow will be at a certain level, but that is nonsense. The second thing is that because the future is uncertain, there's a need for caution. The third thing is that securities can be more than just paper. You should try to figure out the intrinsic value of a business. In the short term, the market is a voting machine where people vote with their dollars, but in the long term, it's a weighing machine that measures the realities of business. 

Be humble about what you don't know

Richard Branson. Chairman, Virgin Group

Branson says he used to confuse gross profit with net profit until a board member explained it this way. “Pretend you're fishing. Net is all the fish in your net at the end of the year. Gross is that plus everything that got away." 

Develop a healthy skepticism

Ed Zore. President and CEO, Northwestern Mutual

As a new stock trader, Zore remembers looking through a list of stocks in the company's portfolio and wondering why we didn't buy more of the highest-yielding stocks.

When Zore asked the portfolio manager, he informed him that when a stock offers a dividend that's high for its category, it can mean that the dividend is in jeopardy.

Ignore short-term market swings

Christopher Browne. Chairman, Tweedy Browne

If you're comfortable with the stocks you own, and they're solid businesses and you haven't borrowed a lot to buy, let the market do its worst. You don't have to do something dramatic just because the market had a bad day.

Sell for the right reason

Don Phillips. Managing director, Morningstar

If you find a great growth company, don't sell it just because it gets a little pricey - you may never get back in again.

Be careful of people you trust

Scott Adams. Creator of "Dilbert"

The only people who can screw you are the people you trust. The people you don't trust never get the chance. So keep an eye on the people you trust.

Learned from J.P. Morgan

Bill Gross. Managing Director, Pimco

On Gross’ office walls are pictures of three people: J.P. Morgan, who taught him that it is character, not assets, that counts most; Jesse Livermore, who taught him that it is important to "know thyself"; and Bernard Baruch, who taught him that "two and two always equal four" and that no one has ever invented a way to get something for nothing. 

Sources

Money magazine, August 2008 issue.