The funniest thing that might go noticed about rich people is how little their income has to do with their wealth. Mike Tyson earned US$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 of them: They are (mostly pleasant) sociopaths Walk through the annals of history and it seems that every rich person has the characteristics of a sociopath. Not in a cruel,…
The funniest thing that might go noticed about rich people is how little their income has to do with their wealth. Mike Tyson earned US$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 of them:
They are (mostly pleasant) sociopaths
Walk through the annals of history and it seems that 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. In her book Confessions of a Sociopath, M.E. Thomas writes:
“Sharks see in black-and-white. Scientists have suggested that contrast against background may be more helpful than color for predators in detecting potential prey, helping them to focus on crucial spatial relationships rather than extraneous details. I’m color-blind in a way that makes mass hysteria seem particularly striking in contrast to normal, expected behavior. My lack of empathy means I don’t get caught up in other people’s panic. It gives me a unique perspective. And in the financial world, being able to think opposite the pack is all you need.”
Napoleon’s definition of a military genius was “The man who can do the average thing when all those around him are going crazy.” Rich people are similar. They remain normal when everyone else can’t.
They care about time periods most can’t comprehend
There are four ways to invest:
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; for instance, both the Straits Times Index (SGX: ^STI) in Singapore and the S&P 500 in the USA have been shown to dramatically lower the odds of making losses the longer an investor holds on to them. But long-term investing is unnatural. We’re hardwired to grab immediate gains and avoid immediate threats. That’s why we eat donuts, drink bubble-tea, and watch CNBC.
Financial advisor and behavioural-investing expert Carl Richards made a great sketch last week:
As Carl notes, studies show that we have the same emotional connection to ourselves 30 years in the future as we do an unknown third-party today. Rich people have the rare ability to bridge that emotional gap. They are allergic to the short run. “If you look carefully,” Bill Bonner writes in his book Family Fortunes, “almost all Old Money secrets can be traced to a single source: a longer-term outlook.”
In August 1929, American 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, it was the Great Depression and the US 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 in the USA the day it hit the stands increased their wealth six-fold over the next 30 years, adjusted for inflation. Missing this is why everyone ought to be rich, but few are.
They don’t give a damn what you think of them
Dilbert creator Scott Adams once wrote: “One of the best pieces of advice I’ve ever heard goes something like this: If you want success, figure out the price, then pay it. It sounds trivial and obvious, but if you unpack the idea it has extraordinary power.”
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.
The reason you can have 35 year-old Singaporean singles earning S$5,000 a month and yet end up with S$20,000 in credit card debt is because their aspirations, desires, and wants have grown faster than their incomes. For every $1 raise most people receive, their desires grow by perhaps $1.10. This is the express lane to disappointment.
Rich people avoid this trap. They care less about what others think of them than ordinary people do. They don’t give a damn, actually. They can get a raise without buying a new car or have a great year in the market and not blow it on a new watch. A lot of them are after control over their time, which comes from having a wide gap between what they can afford to buy and what they actually buy. They are more impressed with retiring early than $90 T-shirts or $20 cocktails. It’s classic Millionaire Next Door stuff.
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. But 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.” It’s seldom any more complicated than that.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Morgan Housel and first published on fool.com. It has been edited for fool.sg.