It has little to do with investing
First of all, let me start by saying that investing is not about keeping up with the news.
It’s really incredible how much news content there is on the Internet, and even more incredible how many investors listen to it as if their savings depended on it. Even if news outlets like CNBC and Bloomberg put four or five videos on YouTube every hour, that’s the wrong thing to focus on.
In fact, the essence of investing is not even in the market itself. You should probably forget about the stock market as a whole, given that investing isn’t about why the market crashes, or even what stocks are best to buy. Forget about that too.
So what is the point of investing? It turns out that the big secret of a great investor is to spend less than you earn. This may sound silly, but it’s actually very important – and I have a great example to show you why.
Imagine two different investors with opposite behavior and the same time horizon of 20 years. Let’s call them Jim and Dwight.
Dwight starts out with zero dollars but deposits $500 into his account every month. Because he wants to be a better investor, he spends all his weekends studying stocks to buy them to beat the market, and – after a lot of stress and sleepless nights – he manages to achieve an annual return of 15% per year. long term. After 20 years, his account is $615,000.
So, 20 years later, Dwight contributed $120,000 and received $615,000. It’s amazing, but it took a lot of effort and risk. Fifteen percent a year is something that only the top 1% of investors in history consistently manage. Now let me show you something that will blow your mind.
Jim, on the other hand, prefers to invest passively in index funds. He doesn’t waste time researching stocks, he has never watched CNBC, and his average return is 9%. Instead, he focuses on his skills, job, side jobs, and savings strategies that allow him to invest twice as much money as Dwight. After 20 years of investing $1,000 a month into the market, it turned out that Jim also had the same $615,000 as Dwight.
I think the example was pretty clear, but the point is that the difference between doubling savings and doubling income is very small. Now, the real question is which is the lighter of the two? Which is easier, doubling your savings or becoming the next Warren Buffett? Personally, I have no doubt that this is the simplest alternative. Especially in 2022, the year of side jobs and job changes. I would say that it is much easier to double your savings than to make incredible profits.
Also, I really want to emphasize how difficult it would be to consistently reach 15% per year. According to people on the internet, it seems easy, but it really isn’t. That’s over 50% above the average market return, and so few people do it that they write books about it. So, again, I have no doubt which of the two tasks is easier.
Spend less than you earn: That’s rule number one and it’s changing the world. And here’s another piece of evidence: the average investor in the stock market is faring much worse than even the S&P 500—not to mention 15% a year.
This strategy also has several other benefits.
First, it is much less stressful and risky than the pursuit of profit. And secondly, you can also stop caring about the stock market and what the analysts are saying. When your focus shifts from what you cannot control (regardless of whether the market rises or falls that day), to what you can have a serious impact on (your business, your work and your life), then you also you start seeing things. with a different mindset as an investor.
If you focus on maximizing your personal income and your skills, you will reap exponential lifelong benefits from it. Because compound interest in real life also happens with salaries, you know. And that’s the key to investing – if you can understand it and focus on it, then everything becomes easier.