I have dealt with rich people or very rich people for a long part of my life. Right from filing their Income tax returns to going with them to the Supreme court to fight with their partners, brothers, cousins…to doing their investment analysis.
Here are some of my observations about why they keep getting richer. Remember I am talking of the journey from rich to very rich or really wealthy!
- They think they are entitled to their riches: there is no question of ‘guilty of being rich’. They earn well, live far far below their ‘entitled’ standard of living and make sure that the material possession does not ‘own’ them.
- They Invest aggressively, and have Concentrated investments: When we talk about investing, and I feel that a particular share is good, they take an aggressively big stand on the same share. So it is never 500 shares, but 500 shares bought say 20 times – regularly on a weekly basis depending on the cash flow available. They also diversify – which is done by mutual fund investing, but the wealth creation has been done by ‘Concentration’ and the wealth protection is done by ‘Diversification’.
- Wealthy people consume a smaller portion of their income than people with a low net worth (fairly obvious I guess). I could hardly say what percentage they spend and what they save, but yes, a lot of money is saved AND INVESTED promptly. Charlie Munger says you should invest first and only spend the left over. Wealthy people do NOT save; they invest. This is an attitude that many people do follow – here I am using wealthy as an attitude and not as a sum of money. Most of the rich people invest in their business – not just in Real estate, shares and mutual funds! It is their business which gives them the highest ROI -return on investment. Real wealth creation does not come from a bank account, mutual fund investments or commodities. Wealth is created when a business family invests capital and receives a greater return than the cost of capital. Clearly, to get rich and stay rich you need to invest in wealth creating businesses. It could also be a wealth creating portfolio.Business itself is a risky investment. Many small businesses do not survive till the 3rd generation, and the only way to mitigate the risk is to spread your investments over a broad range of proven profitable businesses! I know families who are now regularly investing in an index fund – ETF – to spread their risk. You do not need the knowledge or skills of a Vallabh Bhansali to build wealth. You can attain wealth and remain rich by investing in an index fund – provided that you start early and stay invested through panic times! So, enjoy your business, but diversify just in case.
- Having created a base – say Rs. 50L – and having a regular income the advantage for most investors is that they need not panic. This helps in bad times. It lets you stay calm. Many a times the market is pessimistic about companies whose results you like. You cannot do anything but sit tight. In my case my seat belt is fastened in case of Indigo. I am liking the results, but the market is not. I have given myself another one year to watch what is happening, but whatever it is I will not sell it in distress or panic. I may take a call to sell it, but it will be from a position of strength.
more will follow!
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