Mar 25, 2018
Hey guys, and welcome to Finance and Fury.
Today the misunderstanding we're going to be tackling is how to be wealthy. There seems to be a lot of “rich-hating” going on around at the moment, but why? I think it's just a lot of not understanding how people actually got to be wealthy in the first place.
So, today I want to treat wealth, or building it, just like a game. Because most games are pretty fun to play, and it's all about just following the basic rules of games to actually win in the end. And generally depending on the game, it's who's accumulated the most by the end. And we’ll be running through the best ways to win a game - whether it's actually through competition with others or cooperation with others. Because there's a lot of misconceptions around how the economy actually works, how building wealth works, and why the wealthy are actually wealthy, and whether they've competed to get there ie just taken everything from you, hence why, you know, there’s all the hate directed, or if they're just cooperated better than others.
And it's very important to figure out exactly how they've got there because if they've done it then you can actually do it too and we'll be running through how to use these forces to succeed and build wealth for yourself. So let's get into it with Mr. Fury.
Enough is enough. I’ve had it with my personal finances system all over the damn place. Everybody strap in…it's time for finance and fury.
I'm sure every one of you have played some form of game before. You'll have a preference about what types of games you like to play, whether it be a group game, or solo games, or board games. Depending on the games you like you might prefer different play styles. Solitaire has a much different playstyle compared to a game of monopoly and I’ll be using monopoly actually, as an example to help illustrate what things work in games and what doesn't. And I like to use games here just for the fact that they can be fun. Because finance is fairly boring, so why not try to make it into a bit of a game where you can start winning more than you lose.
And the funner it is the more likely you'll continue playing. Firstly, going through monopoly. Does monopoly provide any benefit to any players? If you've played before you're probably familiar with the rules of the game - you all start out with the same amount of money and you all get the same roll of the dice every turn. But when it comes to who gets the advantage, it's really only who gets to go first. It’s a massive advantage. If you get the head start of the first turn and the first roll of the dice, it actually reduces your chances of landing on any properties that are previously been taken.
However, after this first roll of the dice your advantage starts to diminish to zero. Let's use an example - if you’re on your first turn, you go first, you roll a 5... You hit the railroad (you're probably going to buy it) but then on your second turn you roll a 4 then on your third you roll a 6, and on your fourth turn you roll an 8. By this stage if other players have rolled on in the first turn a 9, second turn 15, third turn 23 is a cumulative score, well you're just landing on other properties people have purchased. So, while you haven't actually been able to manage to buy any properties you've been losing money because you've had to pay other players rent. That's where life is fairly similar, where as soon as you have your first turn (or you're born). You might be very lucky born into an affluent family but if you don't take the necessary steps and keep doing the right things and following the rules of the game, you might not actually have the same end result as someone who has just rolled very well.
The basics of monopoly, it's pretty easy to master. To win you simply don't allow any other players to build houses. That can be achieved by either not allowing them to buy three of the same types of property - so you don't allow trades to occur or you purchase them up when they become available, another dirty little tactic you can use is to only build houses and never actually build a hotel so if you take up the full supply of houses no one else can buy them. The other one is to build houses strategically on the most profitable for their cost. And that's actually the orange set, if you have the orange set, or the yellow set, or the red set, they've actually some of the most profitable ones to target for rather than those really expensive ones right at the end, like Broadway.
Another basic is to manage your cash flow reserves well because the last thing you want to do is be in a position [where] you land on someone else's property and you have to mortgage one of yours to pay. Because if you mortgage one of your property you can't get rent off it, and that's your real only way of winning the game of actually getting rent off other players. There are a lot of other tactics which can help as well such as if you're in jail paying to get out early. Because if you're missing the first few turns that's a lot of lack of compounding where the first few turns make the most difference for the rest of the game.
But once the board's fully owned you may as well just spend your time in jail because it's less likely that you'll be able to accumulate any more properties and there's a high chance depending on the number of players that you're just going to be paying rent then.
How to win? How to win is very simple. It's about the number of wins you have to losses over time, compounding. And winning in this is just controlling the board the more wins you have is the more properties that you have, and the more people that are landing on the paying you rent. And you can increase that by having more properties, developing the properties that you have, which will give you a greater win and then actually over time increasing how much those players are giving you. So, if you have a lot of properties you've increased the chance that they'll be paying you rent - but then you develop them so that increases the size of the rent that they pay you. It sounds all well and good but how much of this is actually based on chance? Because when everyone knows the rules to play the game, the difference in outcome is mainly around how well the roll of the dice has worked out for you in the first 8 turns. Then after that the rest is really not too difficult to see who's going to be the winner or not. Because the ultimate outcome of this game once everyone really knows what they're doing is unfortunately luck.
And I’ll be honest, I really don't like monopoly. The outcome is way too reliant on randomly generated chance. And you spend most of the time, depending if there's eight players for instance, you'll be spending 88% or 90% of your time just sitting and waiting for other players to finish their turns. And that's depending on the position you're in. Not that fun if it's eight turns in and you only have a few properties and you're just waiting 90% of the time for the roll of the dice for you just to figure out which property you're going to land on to pay someone else rent. It's not that much fun. And who really wins at this game because once that shift of direction occurs and the clear winner is really present, everyone else feels like they just want to walk away. But if they do that the individual who's winning probably won't be happy either because who wants to be robbed of the feeling of victory?
I find it just to be lose-lose. It's based on pure competition, which is really not a great outcome, because unlike the real-world, monopoly’s just a zero-sum, lose-lose game.
The outcome of it is, unfortunately, where one person wins through taking what others have. Because there's a finite amount of money, finite amount of property, and the board has a finite number of spaces you can purchase.
There have been similar times to this in history where economies have operated fairly similarly to monopoly. Economies controlled by Mao, Pol Pot, Stalin …they've operated in a similar way. So, imagine you're playing a game of monopoly with Stalin. He's the top hat, and he's also the bank. You all get set up to play but he doesn't give you any of your money on the first turn and guess what he already owns all the properties. When you pass go you don't get $200. So, you just spend your time sitting around, rolling the dice hoping that you don't land on any properties that have too higher rent on them because, hey, you don't have much of an income.
But don't try and leave the table, Stalin is a pretty trigger-happy kind of guy.
That situation doesn't sound fun, and for those who have been in it in those economies and societies, it hasn't been fun. But thankfully we don't live in that so why not treat life like it really is as a game where you can actually cooperate to win, rather than competition and that's where the misconception about how to win a game can enter. Is it better to cooperate or compete? I think it's actually better to maximize your results through cooperation than competition. Competition in games is just destructive and it's a win condition unfortunately of most finite games where there's that zero-sum mentality. Any board game has a zero-sum mentality. There's only a finite number of spaces finite number of resources and you're competing to bankrupt other players to win. Healthy cooperation is about improving yourself through interacting with other players to boost, not only your own results, but everyone's through trade and helping other players when they need it. So an example of the real world and how cooperation works is team sports. And it might seem like that's competition. Two teams turn up once a week to face each other in some form of sport whether it be rugby soccer and it's defined as a competition. But I feel like it’s more cooperation. Because both teams turn up and have agreed to turn up at the same time, same location, to play for the same number of periods, follow the rules of the game, and anyone who breaks the rules are penalized.
At the end the results are drawn, they shake hands and part ways. If it was pure competition i.e. win at all costs, it might not be so civil. If it's win at all costs and there are really no rules to follow then you might be more on task to take your switchblade or baseball bat to a rugby game and it just becomes an all-out brawl and who turns up next week to play? Within teams as well there's cooperation, where players are competing against themselves to be the best player in the team while training with other teammates. So the team mentality is all about helping each other, cooperate and those who become the best players generally out of just competing with themselves and having other players to help train with them. If it's a cooperative environment other players really know that that's a benefit to the team when someone else is better than them because it's a benefit for the team overall. If it was a competitive team, it would end up just in an internal sabotage if someone becomes the best player to them they might just injure them in training because who wants to not be the best player.
And remember improving yourself is not the definition of competition here. You can think about it as internal competition for yourself and that's great as long as you're competing against yourself to become better that drives progress. Where it becomes destructive is where it's introduced into the external and you start competing with others and others start competing with you in a destructive way. I like to think of cooperation as everyone working together for the improvement of not only themselves but society. Making it easier for everyone to get ahead and working together can only really be achieved in the presence where there's no mentality around a zero-sum game being present. Society is the sum of all individuals after all. If you have competition in a society then there's not much chance to actually specialize and it's a mentality of just taking what other people have to get ahead. If there's cooperation then people can introduce some comparative advantages where some can specialize in one thing and others can specialize in another. Trade occurs between them and they cooperate. And there's actually growth in the economy present when that situation occurs. But what led to some civilizations over time advancing to that point and others not. To get the answer to that we have to go back over ten, twelve thousand years. When agriculture started being developed by some societies it led to them introducing the stationary lifestyle compared to nomadic that they had been used to in the hunter-gatherer societies.
Being stationary allowed the accumulation of resources and goods and started an increase of food supply that allowed people to start specializing in certain things. Because if your day to day is no longer trying to just feed yourself, and others are producing the food and you can, say, be a blacksmith, or you can be a pottery expert, or just any other field outside of just living day to day. That is a massive benefit to the overall collective of society. And especially when trade occurs and the sharing of technology and knowledge happens across a greater number of people. As the food resources increase and more people can be fed that leads to a massive abundance of technology and shared knowledge.
And that's where trial by experiment comes in, and that's the foundation of most scientific formations, where they would look at what they're trying to achieve, and test different ways of doing that. And that's impossible if you don't have enough food to actually feed yourself day to day because you were more likely just worried about where the food's coming from rather than figuring out better ways to get food. With greater number of people cooperating in different environments as well, it just led to a greater pace of growth and technology through the cooperative process.
Unfortunately, germs had their own cooperation they needed to do, where with living and greater numbers more densely packed especially with animals, disease started to spread at greater rates. And think about the additional sewage that a few thousand people would have, compared to a tribe of a hundred. With insects, rats, ticks, diseases, plagues and other major illnesses developed, it actually wiped out a lot of people in those societies. But thankfully some were semi immune, then they had children who were more immune and they had children as well. So, our biology actually cooperated to make us immune to these germs that were normally destructive.
However, some weren't so lucky by around five hundred years ago where you had parts of Europe that were very well advanced even their germs are very well advanced and other areas that were locked off from the cooperative process unfortunately weren’t. And whenever a more advanced society met a less advanced society it didn't go well for the less advanced society unfortunately.
And it's not for the reasons that you would think. It's germs. The germs were responsible for more massacres and atrocities and murders then the guns and steel that these Europeans had over the other societies that they were meeting that were ten, twenty, thirty-thousand years behind their technological advancements. Where if they were in an isolated situation they weren't able to cooperate and the germs weren't able to cooperate and when they got introduced to these germs it led to mass extinctions of these populations. And the numbers of estimates, even around what the native Americans suffered in casualties from the introduction of germs like smallpox, it's around 90% of their population was wiped out.
And it wasn't out of mal-intent. Germ theory didn't occur until the 1800s and were talking 1500s here. And it was just a tragedy of events that occurred because their germs hadn't cooperated and their biology hadn't cooperated at the point of becoming immune. Societies that were in a position where they had a lack of cooperation, had no growth, and it actually was zero-sum competition. Where if there's no growth, it’s tribes infighting, trying to steal some territory from one another, actually it didn't lead to progress. And that mentality comes from just focusing on what others have and just trying to take that rather than better the position of everyone.
And it can be very hard to ignore what others have. But it's very important. Because how do you measure what your success is compared to someone else's?
You can't judge what you want and your own criteria by projecting that on someone else in the way that you think their life is working out. And who cares what the 1% are doing? Why waste time complaining about it? You’ll find out what they're doing when you get there after all. If you want. It doesn't help to think that monopoly man figures of the world are trying to steal your wealth and that's the only way that they became wealthy in the first place is just by taking it from you.
And I see that a lot of the twenty-year-old protesters out doing the 1% protests or the marches on Wall Street. They're just their whole working life behind accumulating wealth compared to the 65/70-year-old individuals that they're protesting. Warren Buffett's a great example. He was apparently worth 1% of what he is today, even when he was 50 years old. He's around like 87 or so now, so over 37 years he accumulated 99% of his wealth and that's compounding. That's just compounding of around 13% per annum for 37 years to get to 87 billion. Granted he had a much better asset base to start off than most people but you can use those rules yourself.
And it doesn't help to compete against someone like that because how are you going to compete against Warren Buffett? It's all about focusing on yourself first because it's up to you. It all starts at the individual level if you want to change the world start with yourself and if you have more capacity in your own lives you can actually do more and help more and improve the situations of others. So how do you get there? The first step, don't compete with others only compete with yourself while there are many other players in the game you shouldn't be trying to keep track of them or keep track of their score. There’s really billion of players in this game, how are you going to keep track of everyone? And there will always be someone doing better than you and that can be disheartening. So competing against yourself is about just focusing on the outcome you want and not focusing on the competition.
If you know the outcome that you want then who cares what someone else is doing? And it's very hard to compete against the 1% because if you take Buffett again, he's got eighty billion dollars. At 13% that's a lot more in gained value than someone who's gained a hundred thousand percent from bitcoin that they invested maybe twenty thousand dollars in.
When you're playing, the next step is to play by the bank's rules. And this comes back to monopoly because the bank's always the last one standing. And how? Well it’s because they have what people want, and people will exchange money for it if you want a property you'll give the bank money to get the property, or if you want the title, you'll give the bank money to get that.
So, using the basic rules of this game, there's six…
Spend less than you earn - and that's where cashflow is very important. If you're spending less than you earn and you're directing those savings into something that can actually grow and accumulate over time, then you can introduce compounding into your own situation. And you might be surprising, where the average car for millionaires is Toyota, Ford, Honda. Many people think that if you're a millionaire you may as well get a Mercedes or Ferrari or Lamborghini. But the true millionaires know that that goes against the first rule of spending less than you earn.
The second rule is just to start as soon as possible and let compounding do its thing. Because time is your biggest asset. And the marginal increases early on only compound into massive benefits over time. Anyone who's heard ‘The Rule of 72’ knows that generally if you're getting a 10% return you'll be doubling every 7 years. So if you start out early and you have many 7 year doubling periods, you'll be much better in the end.
The third rule is to invest wisely and just keep at it. Never invest out of hope. If you're investing out of hope to make a million dollars and it's only relying on hope coming through if you're investing wisely, you know that these assets tend to appreciate over time in value and pay consistent incomes that you can reinvest it might be boring but at least it's not gambling. Minimizing how much your your wealth is taken from you is the fourth step. How much of your wealth is taken from you can either be in fees or taxes. Minimizing that's essential because if you have more left over to compound through minimizing what goes out the door to others then great you now are in a better position and your compounding can take over. Being confident that you are actually getting better as well as the fifth step because you need to start feeling that you're actually improving your situation but without showing it so you have the need to show off your situation then that breaks rule 1. The final part is the question to ask yourself every day. Would you prefer to pretend to be rich or make it a possibility. Unfortunately you can either pretend to be rich or really just become rich. If you're pretending to be rich you're breaking rule number one again and that breaks down all those other rules where you don't have enough to start investing in compounding over time. And if you're spending more than you own it's pretty hard to minimize. How much of what of what's going away in just you know sunk costs and that's rule 4.
So the third step of this is to cooperate. Cooperation as the community level or shared knowledge is really the impediment of society. Where cooperation is even listening to this podcast working with others knowing that if you ask questions or you seek information that someone will help you. And that's all around learning to buy the right investments if you're cooperating and engaging with others then you can actually pick up that shared knowledge of society and figure out what the wealthy are doing. And the only way to really make money is cooperate. You can either buy the companies you want to profit off which is cooperating with them so entering in a contract where you buy some shares in their business and then they pay you. That's cooperation or you can just stand outside with a bit of cardboard and protest or just try to plunder them or break their premise and that's competition it doesn't really get used that far so again don't compete with Warren Buffett just buy some Berkshire Hathaway shares in summary of all this.
I really don't like monopoly. It's lose-lose and it introduces a bad mentality on how to actually get wealthy the best way to win at any game is to cooperate in the real world and if everyone's working together for the improvement of themselves and then society overall everything will be better off and it makes it easier for anyone to get ahead. Thankfully it works only in situations where zero-sum games are not present and we live in one of those situations. If you think we're in a zero-sum game then unfortunately it's going to be hard to cooperate with others because if you are trying to cooperate with someone your mentality is that they're gonna try and steal all your stuff so you better try and steal theirs first. And that's a breakdown of trust and over history when there's been breakdown of trust between certain groups saying goes when trade stops crossing borders troops start and that's where things turn from cooperation to competition.
And when the some of society is a measure of all the individuals in it, it's better to cooperate with them. Where you can start getting some comparative advantage where someone specializes in one thing you specialize in another. And you trade and get on. If there's competition then there's no specialization and you're likely just going to steal what your neighbor has. So the step to focus on is yourself. It's all up to you where the first step is to not compete with others. Only compete with yourself. Only aim to achieve what your goals are and give little thought to what others are trying to achieve. Because you can't try to compete with them and you don't know what they're doing really so it's better just to save that mental energy and focus on what you're trying to do.
Step two is playing by the rules of work. Either play by the bank's rules of having something that people need and that they'll exchange money for or managing your cash flow well, compounding over time and minimizing your costs and taxes.
Step 3 is cooperating. So, cooperating in a community sharing knowledge helping each other out to improve their situation, but that's not competing with them. It just doesn't matter what they're trying to achieve but if you can help them achieve it with a bit of shared knowledge that is fantastic. And that's what leads to everyone growing in a society but what's next or it all depends on what you're trying to achieve on where to go from here. But we'll leave things here for today and we'll focus on different situations and goals and how to achieve them in a later episode. So thanks for listening guys. And I hope you enjoy the rest of your day.