Getting Rich vs Getting Wealthy – March 2022 Newsletter
Dream 11 has a series of Advertisements where they showcase professional cricketers talking about how much they dreamt of reaching the big league. They then seemed to suggest that you too can achieve greatness by paying and playing on the Dream 11 App. Could not wrap my head around this.
Dream 11 is a fantasy game where you end up spending money. The professionals play the real game where they earn in a year what most of us will not end up earning in our entire careers.
Now, there is nothing wrong with playing fantasy games as long as one understands it’s nothing more than entertainment. But given how influential advertisements can be, do young kids get it as well?
What is the difference between being rich and being wealthy?
Robert Kiyosaki provides his definition of the difference – The rich have lots of money but the wealthy don’t worry about money.
While we all want to be rich, what we actually aim for is to be wealthy. Lots of money is relative, not worrying about money is absolute. In the book, The Narrow Road by Flex Denis, he posts a table of what signifies the degree of wealth.
To get an Indian context to these numbers, one can use a Purchasing Power multiple which currently comes to 22x (One Dollar = 22 Rupees in India)
This means that even to break into the comfortable poor, one will need to have assets worth 4.4 Crores. To be comfortably rich, you will need assets worth 330 Crores.
The question that comes to mind is, do we really need that much money.
A while back, I wrote this post
In India, if you have your own house and don’t have debts and kids to pay for, even a Crore of Rupee can be sufficient to live decently. But…
there are limitations on the quality of life that can be led. Take for example an International Vacation.
I was recently contemplating a 10 day vacation to the UK. Even with Airbnb style of accommodation, the total price for a family of four came to 10 to 12 Lakh depending on other choices we were to make.
The savings nest required to make this feasible has to be a lot larger than a Crore. If I were to wish to make similar trips, say once every two years, the capital or earnings have to be substantially higher or one will blow up the amount in just a few vacations.
Mutual Fund honchos don’t’ waste a day not to talk about how one can get rich through SIP and the magic of compounding. As much as I am a firm believer in Equities to the extent that I am close to jettisoning investments in debt (other than Emergency funds) in favor of Equities, I wonder given the constraints of growth, can one really become Rich let alone Wealthy by investing in public equities?
Investing in an Index Fund is better than Investing in a Debt Fund. But all it does is ensure that one’s money beats Inflation. When we measure our returns, our wealth, literally everything that has to do with money, we measure it in our local currency terms.
But assume we were living in Sri Lanka right now. Does the wealth we had say a month back have the same effect we have today?
From Jan 2008 to October 2020, Sensex doubled in Value in Rupee Terms. In Dollar terms, Sensex just about maintained its value. In other words, while our net worth if invested in say the Sensex would have doubled over that period, in reality, we would have had the same result as someone who bought US Dollars in 2008 and put under his pillow and slept off.
Wealth is mostly relative. The richest guy in a village may not be able to afford a decent house in a large city and a rich guy in the city may not be able to afford a house in say a city like New York or London.
But why should we even bother about being rich in USD terms you may wonder. The reason is that what we buy may be priced in local currencies, the price itself is based on USD. Price of Gold or Petrol is based not just on the local Demand Supply situation but how its priced in Dollars and how many Rupees are required to acquire those Dollars.
Or take higher education for instance. These days the number of kids who wish to go to the US for higher studies has been going up the roof. At the beginning of 2010, the average yearly fee for admission to a Private Non Profit college in the US was about $40,000 or about 18.50 Lakhs in Indian Currency.
Today, the fee has risen to around $53,000, a rise of about 32% but in Rupee terms the fee is now around 40.50 Lakhs – a rise of about 120%. If one had invested the full amount in Nifty Bees in 2010, at the beginning of 2020 (before the Corona Crash), one would have seen it grow by 145%. More or less, just enough to pay the current fees.
When it comes to becoming wealthy, one’s own career choices matter a lot. Lots of luck and Serendipity too matter the most. As one client told me, his growth in Networth has come not from the Stock markets where he is sufficiently invested but in his Career which enables him to earn more and hence save more.
When I look around, the majority of persons I know who have earned a significant amount of wealth have been either Entrepreneurs or had invested in property that has soared in value.
One reason for the fascination with real estate comes not just due to the recency bias when it comes to spectacular returns but the fact that on an absolute level, the amount of money that can be made is huge.
While an investor will not be willing to bet 80% to 90% on equities (with a long term horizon), when it comes to real estate, most investors end up not just betting 100% of their current savings but also borrowing 3 times to 4 times of the same.
This is not possible (without risk of going bankrupt) in equities. In an Economic times article, I found this data point
From December 2000 to December 2012, the equity benchmark indices gave a return of 4x, while prime real-estate markets like those in Mumbai’s posh Colaba have returned 5x.
For an investor who bet 100% of his then net worth and then took a loan for 15 years for the rest 80% of the investment, the realized returns is far greater than for someone who bet a small part of his then networth in equities and then did a SIP for the next 12 years. In 2008 for instance, property prices would have fallen if not as much as equities, but what you don’t see (quotes) is what one doesn’t bother with. So, life went on as usual while most equity investors panicked and jumped out of the nearest window.
The topic of how to create Wealth is complex and there are no easy answers but hopefully have provided some food for thought as you think on the objectives and the path that needs to be taken to fulfill those objectives.
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Book Review: Confessions of the Pricing Man by Hermann Simon
This is a book that has little to do with finance as such. While the book is aimed mostly at Sellers on how to maximize revenue by pricing their products optimally it also is a peek for us buyers on the tricks that help the seller’s extract more.
The book is a revelation on understanding how companies can prosper or fail because of the way they price products.
Before Amazon and the arrival of the online store for example, one paid the price of the book that was printed.
Today on Amazon, the price of a book can change all the time. But there is a method to the madness as well. When a book gets launched, there are a lot of expectations and noise. One observation of mine has been that Amazon ( using Amazon as the example since I barely buy first hand books elsewhere these days) prices it at a higher pitch. Once the initial few days or weeks are over, prices start moving lower till they reach a price that one can say is equilibrium.
Or take the big advertising splash of 25% off one sees on shops. Enter inside and you find that 25% is for a very select set of products that most probably no one wants to buy in the first place. But the objective of getting more footfalls is achieved and one that helps sell the customer a more premium product – something he or she may have wanted but would not have purchased if not for entering the shop.
Bundling is another common tactic to sell more products with the understanding that by buying 2, you are paying less than the sum of parts if each was bought individually. But are you really saving?
In Bangalore, Chickpet Main Road has literally hundreds of Saree shops. Of the hundreds, only one practices a fixed price while the rest allow for bargaining. While the fixed price shop has its customers, the majority love to buy at places where bargains are possible even though one never knows who turned out to be better.
While one won’t be Wealthy by being frugal, understanding the tricks of the trade does help us to maximize one’s own savings.
Dreaming Big is good but Executing Right is what makes the difference.
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