No amount of Education or Intelligence will overcome poor Behavior

The Social Security Administration (“SSA”) collects lifetime income data for individuals which is used to calculate the amount of the social security benefits.  The SSA also collects information on the level of education for each person who pays into the social security system.  It’s very clear that the more education one has the higher their lifetime earnings.  Each individuals’ circumstances will be unique but when looking at the larger population the statistics are very compelling.  More education leads to higher earnings.  Higher earnings increases the probability that you will have earnings available after covering your Basic Needs to save, invest and achieve financial security.  Here is the big “but”…while higher earnings increases the probability it does not assure financial security and no amount of Education and Intelligence will overcome poor Behavior.

There are fields of study called Behavioral Finance and Behavioral Economics which researches how psychology influences financial decision making.  I recommend that you spend a bit of time learning more about this and firmly believe that Behavior beats any degree of Education and Intelligence when it comes to achieving Financial Security.  One of the best books I’ve read on this topic is, The Psychology of Money by Morgan Housel. 

A high school educated janitor beats out a Harvard-educated financial executive

In the introduction of The Psychology of Money, Housel recaps the story of Ronald Read the Janitor and Richard Fuscone the Financial Executive that shows us how Behavior wins the race over Education and Intelligence.

Ronald, the janitor, lived a life of very modest means and died in 2014 at the age of 92 with an estate of $8 million.  Shortly before Ronald’s death the media profiled a story on Richard, the financial executive at Merrill Lynch.  Housel quotes the the former CEO of Merrill Lynch praising Richard’s “business savvy, leadership skills, sound judgement and personal integrity.”  Notwithstanding Richard’s elite education and senior position at a well established financial services company something went very bad.  In 2010, Richard declared bankruptcy and ultimately lost an 18,000 square foot home to foreclosure which sold for 75% less than the estimated value according to the insurance company.

Ronald obviously earned substantially less than Richard over his lifetime and had much less education but he had achieved Financial Security which was elusive to Richard.  Ronald was humble and Richard clearly lived beyond his means.   I am a huge believer that Education is important and Continuous Learning is critical for both financial and non-financial reasons.  We can’t change our intelligence but everyone can pursue learning and modifying behaviors.  

While Ronald’s story turned out well, I want to point out that apparently Ronald owned individual stocks versus low cost Exchange Traded Funds which were not widely available during most of Ronalds’ investment career.  The media stories refer to his ownership of high quality dividend paying stocks and there is no doubt that he was successful in his efforts toward obtaining Financial Security.

Please indulge a saying that I often turn to:  Know what you don’t know.  I believe it is a sign of humility and is a strength of character to admit when you don’t know something rather than try to pretend and make an avoidable mistake.  We all know people who have pretended to know the answer because they felt insecure admitting otherwise or a hesitancy in asking others with more experience for their assistance.  

A wise investor who seeks Financial Security, knowing what she does not know, will not purchase individual stocks if she has not studied Accounting and Finance, has not performed rigorous industry analysis and has not estimated the intrinsic value of the business. If you do otherwise, you will be Speculating! By practicing humility (and instead purchase a low cost broad based index fund instead of purchasing an individual stock) you will strengthen your Behavior and be in a better position to obtain Financial Security.

The difference between being Rich and being Wealthy

Rich is what you see.  Wealth is often invisible.  Until Richard’s public bankruptcy proceedings, Richard may very well have been perceived by others as rich.  His position at Merrill Lynch undoubtedly paid him very well.  His purchase of an 18,000 square foot home and other visible possessions may have reinforced the perception that he was indeed a wealthy man. 

What nobody could see is the debt that Richard acquired to support his lifestyle.  By apparently using a large amount of debt, Richard was, in a sense, speculating that his income would continue to be robust and the assets that he owned would not decline in value.  Apparently, both his income and his assets declined such that he could no longer pay what he owed to his lender at the same time that the value of his assets declined and were less than the debt he owed.

Financial Security is achieved by growing your wealth.  Wealth is your Net Worth.  You grow your Net Worth by wisely investing, on a regular basis, earnings in excess of your Basic Needs.  Ronald was not Rich, but Ronald was Wealthy. 

Is Speculating always bad?  When is it ok to Speculate?

No… but!  Speculating is not always bad.  We speculate every day in financial and non-financial ways.  Making the decision to avoid the freeway because you think traffic is better on side roads.  Picking which athlete will win the next race.  Betting on which horse will win the Kentucky Derby.  Walking to the store with no rain gear when it looks like it will be raining.  Choosing what material you study to have the best chance of nailing a test.

Here is one that may not be obvious:  When you purchase a home with a mortgage, you actually are speculating that your income will continue at a level to service the monthly payments and that the value of the home, over time, will not decline at a time where you are forced to sell.  And, yes, purchasing the common stock of a business because you “like” its products or services, but where you have not performed analysis to determine intrinsic value, is also speculating.

When it comes to the goal of achieving Financial Security the key takeaway is to Invest Wisely.  Investing Wisely can be done by purchasing a low cost index exchange traded fund which you can do without needing to be a financial analyst.  You have a very good chance of obtaining Financial Security if you have secured a savings safety net to support your Basic Needs and/or the loss of income (liquidity) AND you have established a long term pattern of Investing Wisely.

If, after you have put in place your Investing Wisely plan and you still “Want” to purchase the common stock of a business where you have no sense of its intrinsic value, then call it what it is, speculating.  You may get great enjoyment by betting on which horse will win the Kentucky Derby, which college basketball team will win the Final Four, but be prepared to lose 100% of your bet.  Same goes for picking a common stock where you do not have a sense of its intrinsic value.

We see and hear every day about people who have speculated and been rewarded.  Financial Security is achieved by Investing Wisely.  Think of speculation the same as you would think of going to a movie. You spend money and hope you have enjoyment but you don’t expect to make money going to the movies.  If you think of speculation as an expense, you have a good chance of not thinking that speculation will help you achieve Financial Security.

You are OK…it is human to have “Wants”

Everyone has Wants and when we get our Wants our brains send us a message of happiness…it’s much more scientific than what I described but you get the point. Housel’s, Psychology of Money will give you more on this topic as will articles on the role of dopamine in your brain and how it triggers feelings of pleasure, satisfaction and motivation.

Wants cover just about every aspect of our lives from what we want to wear. The foods we want to eat. The experiences we want to live.  Everyone has a different set of Wants.  Going on a dinner date and seeing a movie satisfies a particular Want and it gives you a sense of happiness in doing this.  That’s pretty much it.  When we satisfy a Want we feel a sense of joy and happiness in the moment.  Psychologists will tell you that the sense of joy you get satisfying Wants is generally short lived.

When it comes to money and the goal of achieving Financial Security…it’s very important that you understand three things:  1) If your vision of what Financial Security would do for you is motivating, you have a good chance of achieving Financial Security.  If you don’t, then it won’t happen, 2) Wants come after prioritizing your Financial Security and 3) Speculation is a Want and should be prioritized in your Want budget, not in your Financial Security budget.

It’s simple arithmatic.  You earn money through a job or self employment.  You first pay for your Basic Needs.  After your Basic Needs (food, rent, transportation, clothing, utilities, hygiene items, Emergency Funds, etc.) you invest wisely in your Financial Security bucket and if there is money left over you spend money on your Wants. The amount you need in your Financial Security bucket is going to be different for each person but I’ll write more about this in a future post.