Finance, or better said abundant thinking about resources being unlimited, has still not truly found its place in early school education.
Imagine basic equal shares for all of us living a prosper existence. Even so this being an easier subject to tackle compared too health and relationships, it would be of immense benefit to all of us and future generations who face now burden of accumulated scarcity thinking and resulting pains.
So, let’s give a brief principle view on the “easiest” of those three subjects.
Mind creates matter.
Scarcity thinking is as usual the main source of many struggling with this topic. I am guessing much is also inherent in our history where it seems shameful or even dirty to talk about money. Individual financial abundance certainly isn’t the goal in a true capitalistic society either from a standpoint of corporations, since a scared individual feeling there to be a lack of things, is the best customer to be fooled by advertisement that often aims to make him/her more fearful. In almost all remedies offered there is first a problem pointed out to make you feel scarce and all our basic human needs are smartly addressed and exploited to make us feel imperfect or there being a lack of. As such things are for sale most of us neither need nor want but we buy them anyway and to be able to pay for them work hard for those who sell us what we don’t need or really want.
This most likely is why fundamental principles in this category aren’t taught early on in school. This even so the ‘early on’ aspect encompasses one of the most powerful principles hence named 8th miracle of the world: “compound interest”. Figures are simply staggering when one views how small amounts of money can grow to immense proportion through the help of time. One simple illustration is the bet on a golf game of just 1$ on the first hole with doubling each bet on a continuous hole. Who would guess the final bet on hole 14 to be of the staggering size of over 1 million $ and don’t be tempted to argue amounts might be a lot smaller since one can’t expect a 50% return per year on one’s money. Even very moderate % returns grow to amazing amounts over time.
Controlling risk is mutually important-I have seen professional men in their 60ties and 70 ties crying in the gym showers after naively trusting the system with 401k’s and alike and losing their whole live savings in an instant and with that their dreams and hard worked for retirement securities. In this case it simply is to be said that there is no sure bet and with that I don’t mean to vote for diversification but rather statistics. In laymen’s terms, every deal can go bust but if one applies not more than 2% of total capital on each individual idea one has a good chance to come out ahead. Why? Well, for illustration, let’s say you have a hundred dollars and you lose 50$, how much in percentage have you lost of your principle sum. Yes, you answered right…50%.And now how much in percentage does one have to make to be at breakeven, the original sum, at a 100$ again. Yes, you answered right again 100%. So, you see even so only losing 50 %, it takes one now a staggering 100 % to simply be back where one started. This points towards being prudent of rather having small draw downs (it is advisable to not lose more than 27% of one’s equity curve and I won’t bore you with the math). It is also paired with another principle that in a series of 1000 tries (for example coin flips, that will even out to nearly perfect 500 times head, and 500 times tails, showing) one to expect with a mere 100% probability that there will be a series of 13 to be appearing. Meaning, in the example of the coin flips, as much as there will an even distribution of coin flips on the total count, at some point there will be 13 times heads or tails in a row). So, it is smart to never ‘bet’ more than 2 percent.
(13x2 = 26 % maximal loss; a percentage level recoverable in a growth curve)
Also, worth mentioning is the counter human behavior factor when it comes to money. You might think me referring to us overspending versus paying ourselves first in regards to taking advantage of the compound principle which is of value for sure but we are aiming at something else. We are like birds who go back after each seed to a safe distance, to than come for the next seed. In other words, we like to take profits quickly on a deeply ingrained fundamental behavior pattern. We also as a species become very hopeful in bad circumstances which certainly is a great feature installed by nature when it comes to everyday life to overcome obstacles with a positive attitude, but when it comes to investing or speculation these instincts do exactly the opposite of what money principles are thriving on.
Let us illustrate
If you buy a stock at $ 20 and apply a simple strategy of selling religiously at 19 resulting in a 1$ loss and also with disciple selling at 22 at a profit of $ 2 which results in a risk reward ratio of 1:2 one risks one 1 $ to make 2 $. One could over time actually make a nice profit even so being less than 50% right on the stock picks move (let’s say in a sample size of 20 stock purchases you are 13 times wrong, which equals to loosing 13 times one dollar = -13$, and you are only 7 times right and each of these bets collect $ 2, you make 7 times $ 2 = a $14 profit. So even being a very bad stock picker you still make a profit)
Now this sounds too good to be true and it is. Everybody of you who has participated in the stock market knows why. It is extremely difficult to apply this counter intuitive discipline because the ego aches at $21 stock price to be the bird and to cash in early profits of fear these winnings might erode and stock prices might never reach 22. Vice versa when the stock is at 19 instead of simply selling with discipline on the knowledge of this principle, a strong voice inside might scream not to worry and to hold on since prices might reverses from here. There are ways to remedy such behavior and we gladly share , if you would like to find out more, but for now just let us say it is wise to follow the sum of these financial principles and there are quite a few more.
Financial independence might in a society as we find ourselves to be in right now, where money has become almost a religion, to be a tool of great power to solve the simpler aches of life.
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