My immediate response was that few people are investors but speculators. But then i realize the answer has probably got to do with focus. People who gets rich (ie comfortably, not those obscenely rich kind) does it through owning and running businesses. They obsess over every aspect of their business, and invest all their time and effort into running it.
The other factor is that most of them back their total net worth into their business when they first start out. Which means that the total return on capital has a direct impact on their net worth.
Contrast this with what most people do when 'investing'. Only a small portion of net worth is committed into every good idea. So even if the idea works out spectacularly, the impact on net worth is small.
Imagine Mr Smart, who has a net worth of 100 dollars, found a really good investment and back 10% of net worth into it. The investment return 100% over a year. End of year 1, his total net worth is $110.
Then there is Mr Not-too-Smart, who also has a net worth of 100 dollars. He found a mediocre investment opportunity which he has high confidence in. He invested 50% of net worth into the idea and it return 40%. At the end of the year, his net worth is $120.
Over a lifetime of compounding, guess who will win, who will lose?
Then its time to throw in all finance students' first love, DISCOUNTING!
given that
Future value = Present value x (1+rate of return)^no. of years,
IF you want to maximise your future net worth, there's only 3 things you can do,
1. Invest a lot today
2. Maximise your return (i guess this is harder)
3. Live to a ripe old age to get ahead in compounding (this is the hardest? but darn i'll try)
No comments:
Post a Comment