Thursday, March 21, 2013

James Berman – The Definition of Wealthy

at 1:30 AM

The Definition of Wealthy: Living Small

By James Berman, author of Lessons from the Lemonade Stand: A Common Sense Primer on Investing

Over my years as an investment adviser, I’ve had several clients ask me “Am I wealthy?” as if I can provide an answer somehow they themselves could not. Like the psychoanalyst — and no doubt to my clients’ extreme annoyance — I ask them in return: “Do you feel wealthy?”
They rarely do. And that goes for the clients with half a million, five times that much and 20 times.

Beyond money for basic needs, wealth remains more a psychological construct than a factor of dollars and cents. And a comparative one at that. As the old saying goes, you’re “rich” if you make more money than your brother-in-law. The categorization of the 1 percent is a grand effort at comparison. Aside from the political rhetoric, who hasn’t thought about what percentile they inhabit?

The deeply ingrained and evolutionarily hardwired need to compare ourselves to others and strive to eclipse them is at root a healthy instinct. When it morphs into bitter envy or reckless acquisition, it stops being good for the pocketbook or soul. As billionaire and Warren Buffett-partner Charlie Munger says: “Out of the seven deadly sins, envy is the only one that you will never have any fun with.”

Catch-22 author Joseph Heller was reportedly once talking to Kurt Vonnegut at a Shelter Island cocktail party. Vonnegut pointed to the mogul who was hosting the lavish event at his summer compound and asked Heller if it didn’t bother him that the guy made more in a single day than he had made in a lifetime on his hit novel Catch-22? Heller replied: “I have something he’ll never have. Enough.” Whether or not that was just an author’s disingenuous and clever turn of phrase (and Heller was actually supremely irked as most humans would be), there’s a merit in knowing when enough is enough. As the Buddhists say, contentment is the greatest wealth.

When people are consumed by envy, they make bad investors. I see it every day. The obsessive need to make more than others can lead to excessive risk-taking, over-leveraging and poor judgment. The desire to make more quickly can induce people to trade frenetically and gamble fruitlessly, forsaking the only reliable method of making money on their capital: investing it patiently for long-term growth. Most people should align their assets to make a decent risk-adjusted real return above and beyond the inflation rate, not swing for the fences and strike out in a feverish effort to get ahead. If an investment adviser or broker ever tells you they will make you rich, walk the other way. The most any responsible adviser can do (or at least offer to do, even if they eventually exceed these expectations) is grow your money slowly over time.

A key to acquiring wealth is preventing living standards from rising along with income. Those who let their needs swell commensurately with their wallet never feel rich. They become trapped by the trappings. Fancy vacations, multiple homes, boats and other toys, all become perceived needs. As soon as they become needs, they become traitors and quislings, eventually stealing the very happiness they once engendered. The most extreme practitioner of living small as the money grows is Warren Buffett himself, who still lives in the same house he bought in 1957.

My favorite, usable definition of wealth is having one more dollar per day than you actually need, earned through work you enjoy. And an eventual retirement unfettered by financial cares. Or by envy.

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Genre – Business & Investing

Rating – PG

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Website http://www.lessonsfromlemonade.com/

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Lessons from the Lemonade Stand explains investing, stocks and bonds, risk, diversification, commodities, and other sometimes mystifying topics in the context of that most classic of all American businesses: the corner lemonade stand.

Rooted in the fundamental truth that common sense is the best investment tool, this book slices important concepts into simple sections, sweetening them with folksy, easy-to-read language.

The trials and tribulations of lemonade stand owner Lucinda highlight every concept from interest rates to retirement accounts to leverage. Readers learn investment basics as they follow Lucinda Lemonade Inc. along its sweet (and sometimes sour) journey as a start-up, from the squeeze of the first lemon to its initial private equity deal and its eventual foray into tech, all in the tidy town of Lemonville.

Lessons from the Lemonade Stand simplifies investment concepts without watering them down. A stock, for example, is not defined in financial gibberish but for what it truly is: a slice of the business that entitles the stockholder to a little drop of every dollar Lucinda Lemonade Inc. earns.

The book introduces ten simple Lemonade Laws:
1) Every topic in the investment world can be broken down to the basic concept of supply and demand.
2) If someone claims an investment is risk-free, run the other way.
3) Bigger returns mean bigger risks.
4) Hedging may help, but there’s always a cost to it.
5) As Warren Buffett says, “If you’re smart, you don’t need leverage; if you’re dumb, it’ll ruin you.”
6) You may not be able to count on your stocks, but you can always count on your taxes.
7) By the time you invest in a foreign country, it shouldn’t be foreign to you.
8) Owning a home is (still) the best investment of all.
9) Investing without work is gambling: treat the market like roulette, and you’ll land on zero.
10) Counterintuition, not intuition, is the investor’s best friend.
Entertaining and fun, Lessons from the Lemonade Stand supplies readers with the ingredients they need to become savvy investors.

“By abstracting out the ‘hard’ stuff about investing and focusing on the most simple of businesses, Berman (a finance prof at NYU and an investment advisor) is able to gradually introduce more complicated concepts without overwhelming the reader with jargon. Really, Lessons from the Lemonade Stand encompasses much of an introductory finance curriculum in book form that reads, well, more like a book of fiction than one on investing.”

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