Investing

How Wealthy are you?

If you stopped working today and continued to live at your current standard of living, how long would you last? If you could last a month, then you are one month wealthy. If you could last five years, then you are five years wealthy. And if you could last forever, then you are indefinitely wealthy.”

—  R. Buckminster Fuller

Many people interpret this to mean, ‘If I need $4,000 per month to live on and I have $400,000 saved up, then I am 100 months wealthy.’

However, there is a much better way to look at this concept. What if your $400,000 produced passive income, income you received without having to work? For example, what if you made 12% in passive income from investing in certain stocks with your $400,000? Twelve percent of $400,000 is $48,000, so your $400,000 could give you $48,000 in income. When you divide that yearly income by 12 months, it amounts to $4,000 per month. You could live off that income indefinitely and be financially free. You would never have to work again.”

—  Van K. Tharp

You might wonder if the $4,000 per month that person needed for financial freedom included taxes. It should, but if you meant $4,000 per month after taxes, then you either have to minimize your taxes or include them in your monthly number. The good news is that you’ll pay much less in taxes on passive income than you will on earned income. When your money works for you, the returns don’t get taxed by nearly the amount that your income gets taxed when you work for money.”

—  Van K. Tharp

People are really crazy about minor decrements down. Huge insanities can come from just subconsciously over-weighing the importance of what you’re losing or almost getting and not getting…

— Charlie Munger

One of prospect theory’s most important contributions to finance is loss aversion, the idea that for most people, losses loom larger than corresponding gains. The empirical evidence suggests we feel losses about two to two-and-a-half times more than we feel gains. Loss aversion is a clear-cut deviation from expected utility theory.”

— Michael Mauboussin

So nature has kind of tuned us to look at the negative side…

— Dan Ariely

Why does cash feel so different? The agony of parting with our money has to do with the saliency of, do we see this money going away? And it has to do with the timing of whether the money is going away at the same time we’re consuming.” “For example, we find that if you have a coin flip that you have a 50% chance of making $1,100 and a 50% chance of losing $1,000. The expected value is positive, but we don’t think of it as positive. We think, “Oh, my goodness. If I lost $1,000, I would be very miserable. If I won $1,100 I would be happy, but it wouldn’t offset it, so let me not take that bet.” Now, we think that the reason is evolutionary. If you think about nature, if you get something good (like you get to eat more food and so on) that’s a good thing, but if you do something bad, you can die. So nature has kind of tuned us to look at the negative side because if you get a bit more food, a bit more money or whatever, there’s a positive expected value but it’s limited. Whereas on the negative side, you can lose a lot. So because of that we just attune more to losses.”

Fear has a greater grasp on human action than does the impressive weight of historical evidence

— Jermey J. Siegel

No one is asking you not to feel the fear, because there are  very few of us who ever actually become immune to the emotion. You have to be who you are, and you have to fell what you feel. You simply have to refuse to act on the feeling.”

— Nick Murray from ‘Simple Wealth, Inevitable Wealth” p. 71

I promise you that, if the price of your house were listed everyday in the newspaper, you’d have been scared into selling it two or three times in the last twenty years. But it’s not, so you didn’t — and look where the price is compared to twenty years ago.”

— Nick Murray from ‘Simple Wealth, Inevitable Wealth” p.75