Nov 182019
 

Time + Ownership = Financial Freedom

When financial writer David Bach was just 7 years old his grandma took him to McDonald’s and explained to him that there were 3 types of people in the world: The minimum wage employees working there, the consumers who pay money and eat there, and the owners who aren’t there but can still make money from the restaurant. David’s grandma helped him buy 1 share of McDonald’s, and taught him how to read and follow MCD’s stock chart.

The next time they went to a McDonald’s restaurant she told him, “now you are not just a consumer here, you are also an owner. Every time you eat here you are paying yourself.” It’s a brilliantly simple concept; easy enough for a child to understand. Yet it’s an inspiring and powerful idea. David became hooked on investing. He bought other stocks over time to eventually become a millionaire. πŸ™‚ From the time he bought his first stock to today in 2019, MCD shares have increased in value by over 250 times! But it didn’t happen overnight. It took decades.

McDonald’s menu in 1973 when David Bach was a kid.

Fortunately anyone can become an owner by investing in established companies like McDonald’s. And the best part is you get to earn all your money while you sleep. πŸ™‚

It all comes down to saving a percentage of your income, and investing it on a consistent basis. And then simply wait. The longer you wait the more your money will have time to compound and grow exponentially. Although you can schedule to invest every month, or every quarter, studies suggest you should invest as soon as possible to maximize potential returns.

People who try to get rich quick stay broke long.” ~ David Bach

If we understand that financial success requires patience, then investing will appear to be easier and less risky. For example, imagine if 2 investors held 2 different views about buying a house.

Investor 1) I’m afraid prices might drop in the next year or so. πŸ™ And it’s a rather large investment so I question if now is a good time to be buying.

This mindset makes it difficult to pull the trigger when a good opportunity comes. We act based on what we believe. If we believe prices may fall then of course we will experience more hesitation and concern when buying a house. But let’s look at the second mindset where patience is paramount.

Investor 2) I have the patience to hold this property for at least 7+ years. So after the year 2026, based on macro trends, house prices will probably be much higher than it is now. Most likely rent in the city will be higher as well. Therefore buying a house now and locking in a mortgage balance is probably better than buying a house later and risk taking on an even larger mortgage.

The first person is thinking about the short term, while the other is thinking only long term. The second investor has a better chance of putting his intent into action because his long term perspective provides him with more investment certainty. That’s because it’s hard to know what the market will do next year. But due to inflation and urban densification, it wouldn’t be hard to predict that Vancouver’s home prices will trend upwards over the long run.

To clarify, the first investor is not wrong in any way. His concerns are well justified. But his mindset becomes irrelevant when making investment decisions for the following reasons:

  • A profit or loss is only realized once an investment is sold. So if prices do fall over the next year, it doesn’t define the investment outcome if the goal is to hold it for 7 to 10 years.
  • Short term volatility is par for the course. If you can’t handle being underwater for the first 1 to 2 years of making a purchase, then don’t invest in real estate because it’s a 7 year minimum investment horizon.

Additionally if prices do fall in the short term, how will you know they won’t continue to fall further? How will you decide when the market is low enough to get in?

These are a few potential concerns involving a short term investment mindset. But with patience and a long term view, all this anxiety simply doesn’t matter. πŸ™‚ Being patient focuses your attention on what’s really important, which is the bigger picture bottom line.

That being said, having a long term perspective alone is not enough to succeed. There are plenty of toxic assets that will perform poorly over time. You still want to stay away from those if you can and only buy quality investments.

 

____________________
Random Useless Fact:

The human baby is born pre-mature and more helpless compared to other animals because it needs to come out before the head grows too big.

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S Arun
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Very sound advice Liquid. Invest with longer-term approach always wins.

And, by the way, congratulation to Canada’s newest Millionaire πŸ™‚

Cheers,

Financial Independence
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I wish I would do the same with Apple stock. When first time I was presented with iPod player i told to myself – its a cool company, first time somebody got intuitive interface right. I had $50K available then but preferred investing in in real estate. The real estate is now worth $200K, the Apple stock would be worth $5 million.

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