Monday Night Finance- Volume 69

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Findings from 300 Millionaire Interviews

Do you remember “Who wants to be a millionaire?” That show was such an exciting concept when it came out. An ordinary person had the chance to end up as a millionaire at the end of a television episode. And while the question was referring to the game show prize, in some ways it’s a rhetorical question… I’m pretty sure that everyone wants to a be a millionaire. While “millionaire” carries with it a certain implied status, there are huge differences between millionaires and billionaires. In fact, many people will need more than a million dollars to retire comfortably. Having a million dollars is an important milestone though. It means that you’ve established a great financial foundation and are very likely to not run out of money in your life. ESI money has been interviewing millionaires (and has completed over 300) to see what we can learn from people who have accumulated a million dollars in wealth. In this article, he summarizes what he has learned from his first 300 interviews.

The information I’ve gathered is directionally correct but not precise. People answer my questions in different ways. Plus sometimes there’s conflicting information within an interview (for instance, what interviewees give as their savings rates rarely matches the calculations when reviewing their spending and income.) Given this, I had to read between the lines many times and make some judgements about what’s actually going on. I’m fairly good at this and think I’ve come close to getting it right, through there is surely a margin for error here. ~ESI Money

The ESI in ESI money stands for earn, save, and invest. The millionaires interviewed did all three of these things well. The median savings rate was over 50% of their income yet the median yearly spending was 90,000 USD. Therefore, not only are they saving a lot of money, but they are clearly earning a lot of money as well. Interestingly, nearly 90% of the millionaires were married. Marriage creates the potential for a second income to contribute to the household to achieve a high income. The part of the survey I found most interesting was the biggest fears of millionaires. The biggest fear among millionaires (63% of them) was how to obtain healthcare in retirement. Check out the article for even more interesting tips.

Easy Money is Money Easily Lost

I think we’ve all heard “easy come, easy go” at some point in our lives. But nobody ever says that expression when they are making tons of money with very little effort. Back in 2020 and 2021 we were on a stock market tear. Almost everything was going up. In fact, we invented a new phrase, “meme stock” to describe this phenomenon of rapid growth in companies with questionable fundamentals. And let’s also not forget the amount of wealth that was created (on paper) with the run in dogecoin and NFTs. But as 2022 has started, we’ve started to experience the flip side of that story. The money that was easily earned is beginning to disappear rapidly.

Jason Zweig discovered in the year following the bottom from March 23, 2020 to March 23, 2021, 96% of U.S. stocks had positive returns. That was the highest percentage of winners over any 12-month period in history. It was too easy. Everyone was getting rich investing in stocks, crypto, SPACs, IPOs, collectibles, NFTs, you name it. ~Ben Carlson

In this article, Ben Carlson of A Wealth of Common Sense looks back at stock market returns over the past years. Some of the fastest gainers in 2020 and early 2021 have crashed hard over the past few months. For example, Peloton grew by more than 600% during the pandemic, but is now 91% lower than its all time high. Since percentages like this are a little bit hard to understand, Peloton’s reached a low of $19.72 in March 2020 and now trades at $10.51. So if you bought Peloton at any point during the pandemic and are still holding it, you lost money. That 600% gain in less than a year would have been a terrific return, but you would have needed to sell it at the top. If you bought Peloton near the top, you’ve lost even more of your money. Going through some of these case studies shows the difficulty in beating the market as you need to get lucky twice (when you buy and when you sell).

Sorry, Collectibles Are Terrible Investments

Did you have a Beanie Baby? Was it a rare or valuable one? Did you have ambitions of selling it for thousands of dollars only to be able to flip it at a garage sale for a quarter years later? We all know that Beanie Babies ended up being a terrible investment. But even today people are pushing collectables as a great investment. Whether it is NFTs or “blue chip art”, there are plenty of articles and advertisements explaining why these investment classes will outperform the S&P 500.

Collectibles don’t generate cash flow like bonds or stocks. They can only make you money through appreciation. Perhaps that doesn’t sound like a big constraint. But it is, because in the long run, assets without cash flows cannot increase in value more than the economy as a whole. If something appreciates faster than the whole economy in the long run, it eventually eclipses the whole economy, which is impossible.

This article, by Alan Cole, explains why collectables are not a great investment. While stocks and real estate have a positive cash flow (they produce dividends or rental payments), collectables have a negative cash flow- you need to pay to protect and properly house the collectable. An especially interesting part of the article dealt with a company that can help you buy shares in expensive artwork. Perhaps you’ve heard their advertisements on the radio or on a podcast you listen to. It may not surprise you to learn that the numbers they use on their commercials are slightly misleading. If you’ve been tempting to buy fractional shares of a Picasso, it is definitely worth giving this article a read.