The Wisdom of Wealth

Wisdom Letter #26 | The one about Money

What is wealth?

What is your net worth?

How do you even measure your net worth? Is it your annual package? Is it the money in the bank you saved up? More likely, its the value of all the assets that you own, including your bank account.

That's a good word there, VALUE.

How do you ascertain value in any area of life?

The 10 minutes you spend every week reading this newsletter, do they add any value to you? If yes, can you put a number to that value?

Let’s talk about the tangible assets that you actually spend money on. Like your phone, your shoes, watches, cars, houses and what not. How do they all add up to your wealth?

And add stocks, bonds and mutual funds to the list and things start to turn murky.

Which of your expenses are investments and which are mere accumulations. Does an asset's value rise or fall over time and how does that impact your overall wealth?

And what about cryptocurrencies, what about Bitcoin? Do you own any? Are they an investment asset, or a currency, or a store of value, or a medium of exchange? Or are they just a giant ponzi scheme, a store of junk and a medium of bullshit.

Why do we even need cryptocurrencies, we hardly even understand traditional money well enough, computer code money is just an absurdity to the average guy on the street.

All this and much more, today on The Wisdom Project, we try to answer the most basic questions about money, personal finance and wealth. We get into the big hairy giant called Blockchain, and towards the end, we find out how to get Rich, without getting Lucky.

Read On.

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#1

Baby Steps

Look at this graph for a moment

The most interesting bit in this graph is not that he started early with little money, or that after so many years, he has so much more money than anyone in the world. What's interesting is that he made his first billion dollars at age 56. That's 42 years into his investment journey, and then he added a billion dollars every year after that for some time, and then his net worth has kept growing exponentially ever since.

Yes, he is an expert stock picker, but he is also an epitome of grit and persistence in the investment game. We may never be able to learn his stock picking skills, but we can always learn his behavioural skills.

This short article from ‘Darious Foroux’ talks about such basic rules we must keep in mind to improve our personal finances. It’s a simple list that applies to all of us. Check it out--

5 Money Rules That Will Increase Your Net Worth

(4 mins)

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#2

The Rules of The Game

Does your money work for you? 

Comedian Jerry Seinfeld has a great bit on this question in one of the early episodes of his seminal show. Check this, just 30 seconds

Now, if you're Seinfeld then perhaps you can joke about investments and still be very wealthy. But the rest of us mere mortals must get our heads around the basics of investing. 

As this article from Farnam Street says - "We can't opt out from financial concerns unless we plan to live in a monastery..." I might as well add -- you can't opt out unless you are one of the richest comedians in the world.

The article goes on to discuss some of the most fundamental rules of investing and valuation. Rules, that apply to any sort of investment, be it early stage VC investing, or stock investing, or even when investing in Art.

These are rules we often forget amidst all the hype that's generated around investment assets.

Some of the passages that stood out for me --

…The amount and timing of that cash[future cash flows] determines the value of the business. The more cash to be expected and the sooner it's expected to come, the more valuable the asset is today. That is the fundamental truth about investing. Nothing escapes the orbit of future cash flows…

…An asset that never earns any net profit after all expenses has no financial value..

…Everyone has a unique circle of competence which allows them to understand certain things best and other things not at all…

These are valuable insights we can't afford to miss. Check it out --

Investing: The Rules of the Road

(11 mins)

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#3

The Chain of Trust

What is the value of the internet?

It’s just a network of many computers. I can make my own network of computers at my home, but it will not have any value to anyone.

The internet relies on a concept called "Network Effects" to grow in size. Where the overall value of the network increases with each new member joining in.

One of the oldest application of the phenomenon of Network effects is the imagined reality we like to call Money.

Money was invented to replace the cumbersome barter system of transactions. But the idea of money only succeeded when it had all the people onboard.

Of course when billions of people are involved trust issues start to emerge, and that's why central banks were set up. So that people could rely on money backed by central banks, which were supported by their governments.

A piece of paper only has value as long as the central bank issuing it says it has value. We have seen instances of such pieces of paper losing value within minutes on pronouncements of great political leaders.

We have also seen central banks go rogue and print more and more money to pay off their debts, essentially just offloading all the debt to the public in the form inflation. Some have even called such inflation as taxes on the poor.

So who do you trust when you can't even trust your own government and the bank that funds it? You trust nobody, and you trust everybody.

In Code we trust

You effectively decentralise trust to every participant on a network, you use cryptographic hashing to ascertain the "skin in the game" of every participant. The more resources(CPU cycles and electricity) someone spends to solve a complex mathematical puzzle and to join the network, the more trustworthy she/he becomes.

The more people join such a cryptographically backed decentralised network, the more trust the overall network gains. As network effects kick in, the more participants join the network, the more suitable it becomes to function as a currency. 

Now it can be used to make exchanges of value that we like to call transactions, as it becomes both a store of value and a medium of exchange.

Phew...

That was my humble attempt to understand Bitcoin, adding to the millions of others on the internet, including this paper from the founder of Bitcoin - Satoshi Nakamoto.

While Bitcoin in itself may not become a truly global currency we use on a daily basis like the Dollar or the Rupee. But the underlying technology used to run Bitcoin has massive impacts on the global financial system. I am of course talking about the Blockchain.

Blockchain attempts to effectively solve the 'double-spending' problem inherent to all financial systems. Basically if user A has 100 units of a currency, then he cannot give 100 each to user B and user C. He cannot spend more than what he has.

Yeah, I know that's mundane problem to solve, but that is what central banks around the world are there to do. They keep a track of all the money in the system by being the single source of printing money.

They even put their seal of trust on legit money that we can use in transactions, so that monopoly-money can only be used to play board games.

In any financial system we need a trustworthy way to solve the double spending problem.

Blockchain solves this by keeping a permanent, un-modifiable record of every transaction ever made, verified by all the participants on the network, as everyone has a copy of the entire database of all the transactions every done.

The trust emerges from this immutability of history that a blockchain ensures. Something hard to do in centralised systems which are open to manipulation by hackers or sometimes, even by rogue internal players. (When The Fed prints more money to pay off past debts it’s essentially hacking the financial system and forwarding the debt to future generations, you can’t do that if your currency is backed by a blockchain, you can’t mint more Bitcoin out of thin air)

Blockchain can disrupt our financial systems if used wisely. Checkout this 2016 Ted Talk from Don Tapscott on its ramifications and applications. This is a good place to start if you are an absolute novice.

How the blockchain is changing money and business | Don Tapscott

(18 mins)

Another good place to understand blockchain is this podcast from Planet Money.

They take an innovative approach and talk about a made up distributed ledger system(blockchain) used to validate transactions in an American prison.

Its funny and interesting and makes you want to start your own private blockchain!

Episode 753: Blockchain Gang

(22 minutes)

Edward Snowden is an ex CIA operative, whistleblower, spy, computer scientist and a digital rights activist based out of Moscow.

Checkout this article where he explains Blockchain to his lawyer in an interview format. The casual conversational style makes the complex topic quite approachable. Check it out--

Edward Snowden Explains Blockchain to His Lawyer — and the Rest of Us

(18 minutes)

The more you read about Blockchain the more you realise that its an elementary technology that should have been part of our central systems since inception.

At least since computer code came along. Today the technology is where Machine Learning was perhaps 10 years ago, more hype than real implementations. 

Once the hype dies down and the serious stakeholders get to work we should see it become a basic feature of all trust based tech systems around the world. 

And Bitcoin? Well, for now, it lives to die another day!

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#4

Naval Ravikant is the founder of Angelist, he is an angel investor himself and now over the last few years he has become a sort of an armchair philosopher who Tweets out the most profound insights in pithy, concise statements that you just want to print out and stick up your walls.

He put out a tweetstorm a couple of years ago on the topic - "How to get Rich without getting lucky".

It’s the most valuable insights about wealth packed in bite sized tweets.

Some of our favourite tweets--

Naval @naval

Seek wealth, not money or status. Wealth is having assets that earn while you sleep. Money is how we transfer time and wealth. Status is your place in the social hierarchy.

Naval @naval

Arm yourself with specific knowledge, accountability, and leverage.

Naval @naval

Specific knowledge is knowledge that you cannot be trained for. If society can train you, it can train someone else, and replace you.

Naval @naval

Specific knowledge is found by pursuing your genuine curiosity and passion rather than whatever is hot right now.

Naval @naval

Building specific knowledge will feel like play to you but will look like work to others.

Checkout the entire tweetstorm, start here

Naval @naval

How to Get Rich (without getting lucky):

The tweetstorm has since been converted into many blog posts and even a freely available PDF book.

Naval did a podcast series diving deep into each tweet and explaining the ideas and insights further, Check it out--

How to get Rich (Without getting Lucky)

(3.5 hours) | PODCAST

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#5

Signing off for the weekend, here’s a couple of quotes worth thinking about—

Naval @naval

You will get rich by giving society what it wants but does not yet know how to get. At scale.

Naval @naval

Become the best in the world at what you do. Keep redefining what you do until this is true.

You will get rich by giving society what it wants but does not yet know how to get. At scale.

Become the best in the world at what you do. Keep redefining what you do until this is true.

- @naval

Creating wealth is a side effect of creating value for the world. You create value for the world by finding that unique set of skills than only you can master. Your history, your geography, your perspectives give you a unique stack of talents that you can leverage and become the best in the world at what you do.

And If you create value, the world will pay you for it.

Think about it.

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If you liked what you read, you might like Wisdom Letter #11. It’s a good place to start if you are a complete novice at personal finance.

It’s called “Penny Wise, Pound Wiser”

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This was Wisdom Letter #26. In case you want to revisit any of the previous 25 letters, checkout our entire archive.

And if you’re wondering why we are doing this project, what is the point of it? checkout the intro post, it might make some sense!

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