A Few Ideas on the Relationship With Money and Wealth

Imagine you’ve been keeping a coin in your pocket. You have this circular piece of metal that can be exchanged for goods and services, you are walking down a road by a body of water —it can be a natural occurring river or lake or even a beautiful fountain next to you that calls your attention — you suddenly stop and before it is too late, you see yourself holding the coin in your hand and without a second thought, you throw it into the water.

Then you see it below the water as it dips to the bottom and you get this feeling of joy for doing it. Have you ever asked why some people do this?

When you grip that coin in your hands, you’re in control, the coin could be anywhere else, but right at that moment, you decide the fate of that coin and choose to set it free. Perhaps you get some relief from it.

Many years ago, before clean drinking water was easily available to the public, people used copper coins to clean their water by either throwing them into their water containers or even making copper containers for their drinking water. It was also believed that keeping copper coins in stored water led to good health (and as we now happen to know, thanks to modern medical science, copper is an essential trace mineral for many of our body tissues, helping create red blood cells and maintaining nerve cells and our immune system.) So, eventually, people started to associate good health with copper coins in water, from home-stored water to water in public places, like fountains, rivers, and lakes. As it became more and more popular, it gradually turned into a tradition of wishing good health and good luck.

Believe it or not, there’s great complexity in understanding why people toss their coins into water, whether wishing for good health or prosperity, or as some others do, for what they call “fun” or “entertainment.” For example, there was a tech executive from California in the US who had amassed quite a decent fortune for himself but was also quite the showman. There’s a story that he was at some point skipping US$1,000-gold coins into the Pacific Ocean for “fun.” Or the Brazilian mogul who threw US$185,000 worth of gold (plus some other things like champagne bottles) into the largest wishing well he could find: the Atlantic Ocean.

Although we cannot mandate what people do or not do with their personal riches, scientists and dedicated professionals still debate the reasoning behind some apparently incomprehensible relationships with money and wealth.

Many years ago, Albert Einstein said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t … pays it.” To the eyes of many, compound interest works      counterintuitively. Some even think it is “magical.” Believe it or not, staying the course with some simple basic investment strategies that rely on the “wonders” of compound interest, can result in substantial gains, illustrated by the proverbial timing the market versus time in the market. Think of three people, let’s call them Investor A1, B2 and C3, respectively. They have each invested US$200 a month or saved US$200 a month in an S&P 500 Index fund for 40 years. Over the course of those 40 years, they bought and held the index and reinvested their dividends (for a Total Return fund). Where each investor differs is in the fact that they’ve all used different times to invest in the market (buying more of the S&P 500 Index fund). 

Investor A1, had the worst market timing, saving US$200 a month, every month, and waiting and investing when A1 thought it was the “right time,” which always wasn’t the best time. It was always at the top of the market, when everybody was bullish, when it was at its best and right before a crash. A1 would invest money and constantly watch it drop 10, 20 or even 30 percent.

Then you have B2, who is about as good as you can get, saving US$200 a month, waiting and investing at the bottom of every market downturn, basically pulling off the impossible that many of us wish we could do. And then there’s C3, who invested US$200 every month and didn’t wait for any ups or downs in the market. Over 40 years, C3 really didn’t look at the investment account at all. 

At the end of 40 years, they all look at their accounts. A1, who is the worst investor, had US$700,000. B2 ended up with US$1.1 million. And C3, who didn’t really look at the account until 40 years later, actually ended up at $1.3 million. So actually, C3 did better than everyone else, not even trying to time the market but just steadily investing and staying consistent with the investments.

The story above is not all just about creating wealth, but also about maintaining it. One can secure a good portion of your wealth in a low-cost S&P 500 Index fund, reinvest all dividends and have a pretty decent return to keep your capital from losing value over time against inflation.

It is easy to say, although it is extremely hard to pull off, as most people do not succeed. There are some examples when successful traders have taken the lead and timed the market with very powerful and robust models that rely on time series and machine learning, but these are tremendously hard to come by and most of the gurus trying to sell you timing advice are more than likely not going to outperform a low-cost index fund over the long run.