The Poison of Privilege: Investing Lesson from the 18th Century Rich

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Welcome to the latest issue of ‘The Journal of Investing Wisdom’, where I delve into the thoughts, reflections, and readings that have recently captured my attention. This journal serves as a window into my contemplations and the resources that inspire and inform my journey as an investor. I hope you like what you read below. If you are new here, and wish to get insights and ideas like these straight into your inbox, please click here to become a member.

What I’m Reading

The Poison of Privilege

In his latest post titled A Few Little Ideas And Short Stories, Morgan Housel shared this –

Demographic historian T.H. Hollingsworth once published an analysis of the life expectancy of the British peerage. It showed a peculiar trend: Before the 1700s, the richest members of society had among the shortest lives – meaningfully below that of the overall population.

How could that be?

The best explanation is that the rich were the only ones who could afford all the quack medicines and sham doctors who peddled hope but increased your odds of being poisoned.

I would bet good money the same happens today with investing advice.

Morgan’s concluding thought about investing advice following the same path as quack medical advice is hilarious but also cautionary. The parallel drawn between the wealthy of pre-1700s Britain, who suffered shorter life expectancies due to their ability to afford harmful treatments, and today’s investors, who may be swayed by complex yet flawed financial products and strategies, is striking. In both cases, the very resources that should have provided an advantage instead became a source of harm.

I think the biggest problem with complex, and so often expensive, financial advice is that it can blind us to the simple, proven methods that truly work. Just as the rich of the past were drawn to quack doctors who promised miracles, we might be tempted by complex financial products or the latest market fads, believing them to be keys to greater riches. However, these can often lead to poor decisions and financial loss.

Financial theorist William Bernstein said it beautifully –

The more complex the investment advice, the more likely it is to benefit the advisor, not the investor.

The lesson you can draw from the above comparison – of 18th-century medical advice and today’s investment advice – is to approach both health and wealth with humility and scepticism towards overly complicated solutions.

Keep it simple in both – like healthy eating and exercising for health, and investing in simple products like diversified mutual funds for wealth (index funds for even greater simplicity).

This is not just because simplicity can save you from unscrupulous products and their sellers, but also because simplicity is sustainable. Just because something is expensive or complex does not mean it is better. In fact, it might be the opposite.

Oliver Wendell Holmes, the American physician, poet, and humorist, said –

I wouldn’t give a fig for the simplicity on this side of complexity, but would give my life for the simplicity on the other side of complexity.

Simple can be harder than complex. You have to work hard to get your thinking clean to make it simple. But then, as Steve Jobs said in an interview in 1988, “…it’s worth it in the end because once you get there, you can move mountains.”

That’s also true for investing for wealth creation. In practicing simplicity, and staying the course, over time you can also move mountains.

In most likelihood, all you need is –– Some money as emergency fund– 1 term insurance– 1 health insurance– 2-3 high quality MFs– 10-12 high quality stocks (optional)– Some debt (PPF, FD, liquid fund)– Some gold (optional)Personal finance is simple. Keep it that way.— Vishal Khandelwal (@safalniveshak) January 5, 2024

***

The (Simple) ‘Big Four’ of Health

In continuing to the idea of doing simple things to achieve good outcomes, read this article about how, even in a world of genetic screening and rapid blood tests, the best things you can do to live longer are pretty much the same simple things we have known for ages –

Diet, exercise, sleep, mindfulness. Get those four right, and barring the thorny questions of supplements and drugs, there’s little more that any doctor’s office can do for you — even one with all your latest bloodwork and DNA analysis at their fingertips.

If the solutions are so simple, why even pay for all the bells and whistles? It’s a good question, because even the most high-tech doctor’s office will depend increasingly on whether the doctor can be an effective life coach who encourages you to up your game on the big four.

***

Focus on the Process, Not the Outcome

One book that I keep by my bedside for frequent reading is Ruskin Bond’s A Book of Simple Living. Here is one of my highlighted passages from the book that resonates well with how I practice investing and one key idea I try to teach here – the focus on process vs outcome, on the journey vs destination.

Bond writes –

I learned early – without quite realizing it – that the pleasure of travel is in the journey and not so much in reaching one’s destination. Destinations rarely live up to the traveller’s expectations. And the pleasure is further reduced if you’re checking your watch all the time.

In travel, as in life, give yourself plenty of time, so that you won’t have to rush – you miss seeing the world around you when you are in a great rush, or if you seal yourself off in air-conditioned cars and trains, afraid of the heat and dust.

The adventure is not in arriving, it’s in the on-the-way experience. It is not in the expected; it’s in the surprise. You are not choosing what you shall see in the world, but giving the world an even chance to see you.

My friend Jana Vembunarayanan recently wrote a brilliant post on this very idea of journey vs destination, or process vs outcome, which I highly recommend. He shared a powerful 4S framework from the book The Practicing Mind for developing a process-oriented mindset –

Simplify: Break large projects into manageable chunks. Completing each chunk builds motivation, propelling you towards project completion.

Small: Keep tasks small to maintain focus and simplify your approach.

Short: Work in brief intervals, like 30-minute sessions. This Pomodoro technique makes tasks less daunting than facing hours of unbroken work.

Slow: Do the task slowly by working at a pace that allows full attention to the task at hand.

I applied this framework to the everyday task of brushing my teeth, with surprising results. Usually, I spend about 5 minutes brushing mindlessly. However, by applying the 4S method by dividing my mouth into four quadrants and focusing on each for 30 seconds, I finish in just 2 minutes. Not only is the process more efficient, but my teeth are cleaned more thoroughly, and I feel more relaxed throughout.

He then concluded –

Life is a long process filled with numerous outcomes, yet the time we spend ruminating on these outcomes is just a tiny fraction compared to the total time we spend living. Dedicating our entire life to focusing on this small fraction of outcomes is shallow. Instead, we should embrace and enjoy the process itself, which represents the larger part of our existence.

***

Never bet the farm

Legendary investor Howard Marks relates a funny story his father told him about a gambler who bet everything on a race with only one horse in it. How could he lose? “Halfway around the track, the horse jumped over the fence and ran away. Invariably things can get worse than people expect.”

This story has a valuable lesson for investors. Never bet the farm on a single stock no matter how certain you are about the outcome. You never know when the luck hands you the equivalent of a crazy horse.

The Sketchbook of Wisdom: A Hand-Crafted Manual on the Pursuit of Wealth and Good Life

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This is a masterpiece.
Morgan Housel, Author, The Psychology of Money

What I’m Thinking

When we shift our focus from merely hoarding wealth to using it to enhance our quality of life and pursue meaningful goals, we can develop a healthier and more fulfilling relationship with money. After all, the true value of money lies not in its accumulation, but in the freedom and opportunities it provides.

***

Diversification in investing is not just about spreading risk across different asset classes, but creating a portfolio that reflects the unpredictability of the world we live in. When you include investments that respond differently to various economic scenarios, you are actually building resilience into your financial future. And resilience is a wonderful moat to have as an investor.

Quotes I am Reflecting On

Beware of geeks bearing formulas.

– Warren Buffett

***

The chance of gain is by every man more or less overvalued, and the chance of loss is by most men undervalued.

– Adam Smith

***

Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.

– Peter Lynch

That’s all from me for today.

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Thank you for your time and attention.

~ Vishal