“Slow success builds character. Fast success builds ego.” Ratan Tata, former chair of Tata Group
A young golfer approaches her swing coach and asks, “How long will it take me to master the golf swing?”
The coach replies, “10 years.”
The young golfer, looking impatient, responds…
“I want to master the golf swing faster than that. I will work harder than anyone else. I will push myself to practice for many hours every single day. I won’t rest until I become a master. How long will it take then?”
The coach considers this new information, smiles, and answers, “20 years.”
This story brings to life a concept called the Law of Reversed Effort, coined by author Aldous Huxley:
“The harder we try with the conscious will to do something, the less we shall succeed.” (source: Sahil Bloom newsletter).
The same concept applies to those that try to condense the time it takes for building wealth.
In our instant gratification world, the tried-and-true path of wealth building i.e. save, compound, time, is simple & boring. An impatient investor could say, “that might be okay for the average person, but not for me”.
In my opinion, this is a dangerous mindset.
Warren Buffett’s original partner in Berkshire Hathaway was Charlie Munger. What most people don’t know is Buffett and Munger had a third partner, Rick Guerin.
Rick was an excellent value investor that aligned with Buffett and Munger’s approach of buying great businesses at deep discounts.
Despite being at the ground level of Mr. Buffett’s business & investment journey, why have you never heard of Rick Guerin?
Here’s what Warren Buffett had to say…
“Charlie and I always knew that we would become incredibly wealthy. But we were not in a hurry to get wealthy; we knew it would happen. Rick was just as smart as us, but he was in a hurry. And so actually what happened was that in the 1973-74 downturn, Rick was levered with margin loans. And the stock market went down almost 70% in those two years, and so he got margin calls, and he sold his Berkshire stock to me. I bought Rick’s Berkshire stock at under $40 apiece, and so Rick was forced to sell shares at $40 apiece because he was levered.”
As of 4/24/24, Berkshire Hathaway ‘A’ shares (BRKA) are trading @ $610,600 per share.
Yikes!
Instead of exercising patience, Rick tried to speed up the inevitable process of building wealth by taking on leverage. He eventually ended up selling Berkshire at a fire sale price. Warren Buffett and Charlie Munger went on to become two of the richest and most successful investors of our generation.
In short, Rick was in a hurry to get wealthy.
Many investors think maximizing returns every year, swinging for the fences, finding the next Amazon or Nvidia are the keys to building wealth. While that might work for a small few, it’s the exception rather than the rule. In my experience, potential disaster is the most likely outcome.
Psychology of Money author Morgan Housel agrees, “Good investing isn’t necessarily about earning the highest returns, because the highest returns tend to be one-off hits that can’t be repeated. It’s about earning pretty good returns that you can stick with, and which can be repeated for the longest period of time.”
In risk management terms, it’s about staying in the game, being mindful of risk, and living to fight another day.
Here are a few examples of investor types that might be prone to “rush to riches,”
- Pre-retirees that think they’re behind saving for retirement and need 20% per year to catch up.
- Mid-career professionals that haven’t saved enough for retirement.
- Young dreamers that see “Instagram wealth” and buy all sorts of crap (i.e. NFTs, meme coins, hot theme of the day) in an attempt to hit it big.
One could argue retirees that can’t let go of the wealth building mindset are prone to the same mistakes (see “What’s Your Retirement Enough?“.)
There’s nothing wrong with saving, investing, compounding, over a period of time. In fact, you can’t help but build wealth by following the boring old playbook.
The harder we try to squeeze out every ounce of return, swing for fences, speculate, reach, and take too much risk, the potentially worse off we are.
The biggest investor mistakes come from trying to condense the natural process of building wealth by cramming it into a few short years.