Stock market investing
Welcome to Investing for Beginners podcast, this is episode 40 in which Andrew and I are going to talk about “The Richest Man in Babylon” a book that was written by George S. Clasen. This was written back at, but we even know the 30s is that correct?
- Learn to save money
- Put your money to work for you
- Find a way to increase your income, either from a side job or a raise at work
- Use compounding to your advantage
Andrew: yeah man I don’t have a clue, hopefully, glean something out of it.
Dave: okay fair enough, so we’re not exactly sure when the book was written without having it in front of us. Yeah but it’s one of the easiest books to read, and it is amazingly insightful, and it has a lot of great advice about personal finance.
And it was one of the first books I read when I started digging into investing in kind of personal finance. And again the name of the book was The Richest Man in Babylon, and we’re going to talk about the seven cures for fattening the purse.
So he has seven different cures that Andrew and I are going to go through and talk a little bit about so I’m going to have Andrew go ahead and start us off with number one.
Andrew: Yeah, I mean I think everybody out there who wants to complain about finances. If sees himself in as a tough situation and wants to crawl out of it should read this book and listen to this episode over and over again.
Because a lean purse I mean you can just see that imagery and when you hear those words and this very powerful love. The ancients you know these dislike very ancient mythological kind of theme that he put to this book.
So and yes it was one that I also recommend it, I recommend it in my Seven Steps to Understanding the Stock Market. I have a post where I recommend various investing books, and this is definitely up there it was one of the first I also read and just picked it up. Probably didn’t put it down until I finished reading through, it’s an easy read, and that’s super insightful, and it can inspire you because then you feel like you know what to do next because that’s the thing about a lot of these concepts we like to talk about on the podcast.
If you’ll notice Dave and I will focus more on timeless principles rather than you know what’s what was hot on CNBC yesterday I think there are certain principles and fundamental philosophies and foundations that really will work no matter if it’s 2017 or if it’s 3017.
You know what I mean it’s just one of those things and we’ve seen it like you say I think is the 1930s. I’ll put them through the book looks like he has versions from late 1920, the 1930s and 1950s. Even so, I’m sure there’s plenty of versions of this book, so this is something that you know they say when you talk about books. The longer, the older the book is, the more valuable it probably is.
Because if people are still talking about it today I mean just really stood the test of time and The Intelligent Investor is one of those The Richest Man in Babylon this book is one of those.
So pay attention don’t take these cures for a lean purse lightly it’s just some really good stuff so now that I’ve gone on a complete tangent let me answer what you said number one.
The first point is starting thy purse to fattening.
Love the purse metaphor. yeah you see this advice if you talk to anybody who wants to talk about being successful. I mean obviously if you want to make money you got to have money, and a great way to get money as the beginner is to get yourself a good career. Get yourself a good-paying job, equip yourself with skills and education to be able to create an income for yourself basically and then from there make more income.
So start off with this note, this number one point is to make sure you have that foundation down, and you hear this a lot with a lot of the personal finance gurus. I know I used to listen to Dave Ramsey a lot when I was first starting now he gets phone calls from people all around the world, and they tune into his radio show and a lot of them say hey man I’m in a ton of debt and you know I make like twenty-five thousand a year and I’ve got like 50 grand in debt.
Like how do I break out of this it seems always to be this theme where it’s like dude you got to pick up a second job, or you got to go back to school, you got to get that income up. Because you can live a frugal lifestyle, you can do all those all the right things you could try to make more money in the stock market all those kinds of things but then if you’re starting from a small base you’re not going to be able to overcome and make the kind of gains and profits that you need to have like a base source of capital and a base income to start from.
So that’s obviously number one is you got to get a decent income you have to make a decent living for yourself and so to do that in today’s world sometimes that means getting a degree sometimes that means having a certification or just having relevant work experience in a field that pays well.
And I think that’s the crucial part here is to be having skills in things and industries that pay well. You can be the best you know artists in the world but if there’s no market for your art you’re not going to make any money so it doesn’t matter how much more skilled in the art you become. You either need to become a better marketer or find somebody who can market that art for you.
Just trying to focus all on one thing when it’s not a profitable endeavor is going to have diminishing returns. So I think in the long way that’s same like make sure you have the basics on understood make sure you have the groundwork set to create wealth for yourself really and I think that’s common sense nowadays.
Dave: yep exactly, so that’s as broad output. So moving on to the second lesson.
Control thy expenditures
So the main lesson of this parable is to control your spending. So if you can learn to live below your means, it will enable you to begin to accumulate wealth.
So you know he says in the book that we need to budget our expenses so that you may you can make money to pay for your necessities to pay for your enjoyments and to gratify your worthwhile desires without spending more than 90% of your earnings.
The key here is not to deny yourself and Ramit Sethi, who is one of my favorite writers. He talks a lot about that in his books and his blogs when he talks about budgeting and living as you know a rich lifestyle and you know he talks a lot about you know is it worth you know saving that Starbucks for you know trying to save more money. You know it kind of goes back to what Andrew is talking about is you know learning to earn more money whether that’s making your money work for you, i.e., dividends, which Andrew and I talk about all the time or whether it’s just earning more money. Whether it’s a side job or whether it just isn’t earning more money in your career.
But controlling the expenditures is also key here because as you to earn more, it doesn’t mean you need to spend more. And that’s one of the fallacies, and that’s what some people get in trouble with, and I saw it all the time at the bank because they earn more money they spent more money and they didn’t learn to control their budgeting, so that’s really what it comes down to.
You don’t need to deny yourself to get where you want to go. You just need to learn to control the spending so that you can you adjust for what you want and still not deny yourself because there’s nothing worse than you know saving for 50 years to you know have a great retirement, and you’re bitter and angry because you denied yourself all those years.
I mean that’s not what life is about. We’re all here one time we only get this one life, and you should enjoy it. but you have to also be under control about it as well
Andrew: yeah that whole lifestyle inflation thing, it’s easy to get trapped in the right.
Dave: Mm-hmm very much true, yep.
Andrew: yeah control its key. Number three:
Make my gold multiply.
Well if you’re listening to this podcast then you’re already halfway there right this is what we’re all about this is the investing this is putting your work putting your money to work for you. So you don’t have to work for money for the rest of your life.
The whole concept behind now obviously if you want to make money while you sleep. You want to you want to accumulate assets, the rich accumulate assets and that asset creates an income for them.
The people who are wealthy have to rely on paychecks, and obviously, we see the downfalls of that. Every time there’s a recession every time there’s a ton of layoffs in the bear market and the economy is just generally bad.
You see on the employment go up, and you see a lot of people have to either dip into their savings to keep afloat get into a lot of debt to keep afloat or you know, and someof the even more terrible situations you have people who have to sell their homes they get foreclosed on and they really just have a really rough go of it whereas if you hold assets and if you can get to a point of financial freedom which is the this whole podcast we’re hoping that everybody listening can make a journey and eventually reach that point if you have financial freedom and you have these assets they will pay you an income regardless of what happens to the economy regardless if unemployment goes up assuming you have investments in companies that don’t go bankrupt which is everything that we tried to do without you know with my products and services everything we try to share here on the podcast you will still receive that income because business generally continues to run yes you’re the value of your investments may go down like a bear market hits and as the economy shrinks but as somebody who has financial freedom you are hopefully you know the whole definition of that means being able to live off those paychecks and those dividends and the investment income. So it really at the end of the day doesn’t matter what the value is because you’re still receiving that income day in and day out.
So that’s kind of the gold standard that’s why we like to focus so much and really put out all this content for you guys is because it’s obvious you know it’s one point out of seven on this list, but it’s obvious there’s obviously a lot involved and there’s just so many options but the fact that you’re here the fact that you’re listening to the fact that you have enough of an interest to pursue this means that you are putting yourself in the right path because obviously, this is one way to even if you have what he calls a lien purse today.
You can take these steps to make your purse full later on and making your gold multiply through investments that’s a great way to do that.
It exactly that’s exactly right, and that’s what I took away from reading the book as well it’s really kind of the angle that I like it and you know speaking of when you start to fatten your purse you know an important thing is number four which we’re going to talk about next.
Is guard lie treasures against loss
And there are two ways of looking at this. One is insurance it’s a necessary evil nobody likes it nobody likes to pay for it. Probably the only people that like it are insurance salesmen, but it’s a necessary evi.l we have to have it so as you create those assets and as you build your wealth you need to have more insurance to make sure that you do not lose those in case there’s an accident there’s something happens with our health any unseen circumstance that could cause us to lose that wealth of we’ve worked so hard to build and the other aspect of that is this is right up Andrews Avenue is bankruptcies.
You know his value trap indicator as we’ve talked about before is an amazing tool to help you find great stocks that are not going to go bankrupt and you know bankruptcies are one of the absolute worst ways to lose all that money that you’ve worked so hard to earn.
That’s why we’ve talked about some of these companies like Tesla and Snapchat recently is because we feel like those are you know maybe not today but they are prime candidates for something that could happen like that. And you know with the tools that Andrew has created you can help prevent you know these losses from your portfolio in such an easy way and you know it’s an amazing tool and I know we’ve talked a lot about it in the past.
But it is a great way to help guard your treasures against loss, and that is one of the biggest ways to make sure you make money is by making sure you don’t lose money.
you know Warren Buffett’s talked about this you know in the past, and I’ve mentioned this before as you don’t have one of his famous parables is
“Rule number one don’t lose money; rule number two don’t forget rule number one.”
I mean you know it’s it seems simple and easy to think about, but if you don’t lose money, you will never lose money I mean it’s just you know duh but anyway I digress. So you know I think you know between the insurance having a tool that can help you avoid bankruptcies, or you know a losing stock in the stock market is critical to maintaining your wealth.
Andrew: yeah, it’s margin of safety with an emphasis on safety. Exactly and by being a value investor and buying value stocks, that’s what you’re going to do naturally, and that’s how you can craft and guide your investments towards basically when you lose less money you compound at a much higher rate and a quicker way.
And that just exponentially becomes more powerful as the time goes on exactly point number five make overnight wine a profitable investment. Now I probably shouldn’t be speaking about this considering I don’t have any real estate of my own but obviously, he’s talking about dialing this is the place you live and so one way we’ve seen recently is this trend to do like the whole Airbnb thing.
I think it’s pretty cool for people who have extra bedrooms or maybe like a shed to get on Airbnb and rent out a room but I think it just, in general, you can build wealth by buying a piece of real estate and if it’s somewhere that you plan to settle for decades anyway.
Why not keep that rent you know I mean it becomes a mortgage payment after and it’s no longer rent payment and so not only are you paying yourself but you’re keeping that payment consistent through the 15 years or 30 years or however long you make your mortgage.
An easy way to up your assets and up your retirement portfolio obviously and so why not do it I guess I have my reasons for not wanting real estate now or anytime shortly. I used to be on the Money Tee Podcast, and one of the panelists there Miranda Marquette is very has a very similar mindset that I do as she had a bad experience with real estate and so we both prefer to rent for various reasons all of those overlap. But for a lot of people out there if you can get a piece of real estate you’re going to stay there a long time it becomes a net positive review from a financial standpoint and you are doing it within your means and as a good quarter of your you know a good percentage in terms of your budget and terms of your overall spend.
Then I think it’s obviously a great move financially and it can move you closer towards reaching that financial freedom goal.
Dave: yep exactly so you know I’m kind of right there with you with the whole owning a house and you know I just from for my reasons I just have chosen not to I’ve seen too many people in the banking world that were house poor in other words you know the house is a great asset but when it prevents you from a being able to do other things to invest for your future. Then it can be you know it can be a real drag, and you know if you’re spending way more on your mortgage that doesn’t allow you to enjoy your life then is a really good investment.
I guess that’s kind of the question I would ask, and that’s probably a conversation for another time.
To ensure a future income
So this is something that’s big to my dear to my heart is setting aside money during our working years to ensure that we have enough money for our retirement. You know today we got so many vehicles to do that we’ve talked about this and just recently with the 401k we have you know Roth IRAs traditional IRAs there are so many different ways that you can set aside money, and it’s critical that you start doing that now and the earlier, the better you know Andrew has an amazing advantage because he’s much younger than I am and he has these you know many decades to compound his wealth, and we’ve talked a lot about the power of compounding, and I want to give you a little-known fact here.
Benjamin Franklin he left a thousand pounds and a trust which he bequeathed to the cities of Boston and Philadelphia with the provision that the money was to remain untouched for two hundred years the money in a trust grew to two million dollars for Boston and five million for Philadelphia this is all without a single contribution during those 200 years.
Amazing isn’t that it’s just that’s just ridiculous. So we put a thousand dollars in a trust it’s going to grow for 200 years, and it grew to 2 million and 5 million respectively, so that’s just that’s just amazing, and I think that just illustrates you know the power of compounding and if you are diligent and you are listening to this podcast this is something that obviously is an interest for you, and I can’t encourage you enough to start now.
The America is such a huge crisis looming with the retirement problem and you know people have for whatever reason it’s become a situation now where people think that Social Security is going to be the retirement, and it just isn’t so it’s just whether it’s going to be there or not as you know that’s a whole other conversation but the fact is that it’s not a lot of money you know even if it’s there for you when you retire.
It’s not a lot of money, and I saw this first hand again at the bank every single day you know people that are living off of Social Security and are making their living off of 580 dollars a month or$1,000 a month or 1200 hours a month and you think about what you make now and then you try to think about how am I going to live off that $1,200 a month and that includes having to pay rent or mortgage a car god, forbid your car dies how do you go buy a new one.
I mean there’s just so many other things that go into this, and the fact that our society has not embraced setting aside money and using the power of compounding is it’s just such a shame, and it’s it’s kind of criminal that the government and our education system has not just beaten us in into our heads that this is something that we need to do.
And we’re such a life now you know enjoy the moment society that we don’t think about what’s going to happen 10 20 30 years from now, and we have to, and that’s why Andrew and I are so passionate about this, and that’s why we talk about this so much is that this is how you can you know be successful with your finances.
Andrew: Oh yeah 100% there is a tragedy I really implore if you don’t really get the power of compounding interest type into Google whenever you get a chance compound interest calculator play with the years you know to try the set maybe how many years you have until you retire if you’re close to retirement age already consider that the life expectancy just continues to grow as all these medical innovations have come out and so you know put in a couple decades three four decades however how ever many you want to be put in a dollar amount that might seem like a goal a future goal or something that’s maybe somewhat reasonable and put in ten percent a year for the stock market average and just see visually see it for yourself because this is a podcast we can’t do it for you. I’ve done it on the blog but see for yourself just how fast and how great the money grows to I mean to turn a thousand dollars into two million like that I can only imagine if it was investing in like value stocks. I imagine they probably messed with something very conservatively, but they feel as invested in value stocks instead of that for two hundred years or even just the market, in general, it would be astronomical.
So do that and understand that that’s your path to freedom in the future is to is to utilize that and there’s a lot of power there.
The last cure for a lean purse by George S. Clasen, he says.
Increase the ability to earn
This is so key I mean I have so much to say about entrepreneurship that I’m not going to today because I never want to get started but it’s I’d argue that it’s maybe even more important than investing.
If you’re looking to, I guess if you have big dreams you know I think investing anybody who has an average income may be an average career I think they can become a millionaire for sure. Just through brilliant long-term compounding and things we talked about on our podcast I think the people who maybe want to do that at an accelerated rate you know if they want to retire early or if they want to let’s say be like in the tens of millions instead of just a couple million.
I think entrepreneurship is where that is and increasing the ability that earned doesn’t just it doesn’t just stop at like entrepreneurship. I mean if you want to hustle and go out there and there’s just a million different ways to make an extra bit of money picking up a second job driving an Uber, doing the hope opening your home to an Airbnb you know doing some freelance writing, reaching out to other influential entrepreneurs that you see and be like hey how can I work for you or how can I do what you’ve done.
There’s so many ways to just literally get off the couch and make more money for yourself and if you can create like a buffer right where you have your budget you have all your expenses that are set and if you have extra money that’s coming in and you can either pay down more debt with that money or put that money straight into the stock market and let it grow.
Having that extra income and having those extra earnings and just putting them all towards your goals or just going to help you in such a great way, and when you multiply it out with compound interest, then you’ll see it happen on an even greater rate.
So I think increasing your ability to earn that can apply to what you do outside of your free time if it means even getting a raise or a promotion at the job you’re at now we always talk about or I know I do is how you need to have money to make money. The difference between 10 percent and 11 percent a year returns on your investment is huge.
The difference between being able to invest a hundred dollars a month and a thousand is even huge, and that’s terrible grammar and me don’t care but honestly again if you want to do a compound interest calculator, play with numbers maybe look what like a pizza delivery job with what that extra income per month would do over for the year period do that and understand that it is such an empowering idea and there’s a such an empowering discovery to have when you can understand just how much opportunity that there is today with the internet with how easy it is to open a brokerage account with how many resources and pieces of information are out there to teach you how to make your money work for you. And when it gets down to it you might realize that the only person who’s holding you back is yourself and that’s the only person to blame at the end of the day.
So I think to take these seven cures and take them to heart understand that each one is very important and there’s just a lot of ways impacting each word that you hear, and if you haven’t read the book I think it’s like six dollars on Amazon. Something ridiculously cheap it’s worth every single penny, and I think it’s paid so many dividends for me on a personal standpoint, and it sits on my shelf right next to Intelligent Investor as this is one of my tops if not top two at least top three top five favorite and listing book.
Dave: I agree it’s one of my favorites and it’s so easy to read, and it’s so insightful, and it’s so packed with so many you know great nuggets of wisdom, and it’s written in a style that you know he uses several different characters, and he talks in parables and it just makes it really enjoyable to read and you’re learning something while you’re reading and it’s so cool.
And the last little thing I wanted to talk on about this is learning is really the gateway to so much in life and with today’s age of technology there are so many opportunities to learn something new that you can put to use either to help you earn more money or to be better at the job that you’re already doing or to find an interest so that you could parlay into way of making income and you know I think about iTunes University which is a great place where I learned a lot of great stuff about finance. And I know the Ivy League schools have online courses that you could take for free and there’s just so many opportunities out there to learn.
One of my favorite things about Warren Buffett and Charlie Munger these guys don’t matter their age and no matter their wisdom and their intelligence they are constantly learning machines and they’re always reading and trying to better themselves and learn more and more and more, and I think with that kind of hunger for knowledge. You can’t help but get better and earn more money and on the way to because.
Andrew: yeah it could atrophy if you don’t use it. But I find whenever I learned something new it reminds me often things I learned to like a year ago.
Dave: yeah exactly I agree.
All right so, Andrew, I think there was one other thing you wanted to say to the listeners so what was that.
Andrew: Oh that’s right yes so I got an email today from email subscriber and we had mentioned in the past about trailing stops so we had recommended that you use Yahoo Finance for trailing stops because they had a feature on there where you could put in the stock ticker put in an alert that you want once the stock reaches that price and then they’ll email you to say hey the stock went under this price unfortunately. And Dave I think you know more about this than I do as far as the whole scope of Yahoo Finance but I know for a fact that they shut down the feature to be able to track your tickers and get email notifications like that and they’ve done more I mean they shut the whole thing down or something they haven’t said yeah they haven’t really shut the whole thing down yet – but they have shut down the portfolio feature so you can’t create a portfolio stocks that you can track which is what allowed you to you know, and you know to enable the trailing stop feature that end or night likes so much so you know now if you have a watch list or if you have a portfolio then you wanted to use Yahoo Finance to keep track of it.
That feature, unfortunately, is no longer there and I think it’s just kind of a prelude to them basically shutting down the whole finance page it hasn’t been done yet but they’ve really dumbed it down and made it a lot less friendly than it used to be so I don’t have a replacement for it yet, to be honest with you I don’t know if Andrew does, but I do not there are you do have to pay for them because I checked my portfolio every month.
I update the stock prices at for every single position of my portfolio, and I’m looking at that every month so to me that’s enough because again my trailing stops very conservative it’s a 25%.
I do have the potential to lose out on a couple of maybe I’m a couple of days late on the trailing stop god forbid we see like 75% something like unprecedented where it goes 75% in a few days. I don’t see that happening, but again you never know that’s just kind of the risks you take if you want to go ahead and put money towards like a trailing stop tracker service.
I think that’s more power to you. Personally, I would rather just have that money right in the market, and you know these stocks are moving maybe at most 5 to 10 percent at most a month. Again we don’t know what the future holds but that’s just a risk I’m willing to take, and I am checking every month with every position, so that’s kind of how I’m monitoring my trailing stops.
Obviously, at times where maybe I have more free time where I’m doing more stock market research, I can kind of take the temperature of different things, but it’s completely up to you and like we said there’s it’s unfortunate because it was such a great feature and it put everything on autopilot.
But as of now there’s nothing like that if you guys are aware or something that’s free that’s very similar to that shoots us an email, and I thinks that would be something that we could share with the listeners.
Dave: all right well I think that’s going to wrap it up for us for tonight. I hope you enjoyed our conversation about The Richest Man in Babylon and all the great advice that he gave us to help fatten thy purse.
So without any further ado, we’re going to go ahead and sign off you guys go out there and find some great intrinsic value and invest with a margin of safety emphasis on safety. Have a great week, and we will talk to you guys next week.
Stock market investing