Just like magic
The purpose of a magic trick is to amuse and create a feeling of wonder; the audience is generally aware that the magic is performed using trickery, and derives enjoyment from the magician‘s skill and cunning. Traditionally, magicians refuse to reveal the secrets to the audience. They even take an oath to never reveal these secrets.
The Magician‘s Oath: As a magician I promise never to reveal the secret of any illusion to a non-magician, unless that one swears to uphold the Magician‘s Oath in turn. I promise never to perform any illusion for any non-magician without first practicing the effect until I can perform it well enough to maintain the illusion of magic.
Unlike the magician who relies on an illusion, many investors rely on true magic. They rely on what Albert Einstein described as the ―eighth wonder of the world‖- compound interest! Compounding, an investor‘s best friend, can certainly make you rich! It never ceases to amaze me when I look at the balances of some of my clients over the past fifteen years. What started with a few thousand dollars have become six figure accounts. Do you realize that some families thrive for generation after generation because of compound interest?
Money making more money
Trust funds, even invested conservatively, keep growing because with compounding, the trust earns interest on its principal, as well as on the other interest that has been accumulating. Getting started with investing as early as possible can make a big difference in how much wealth you amass. The benefits of saving early in life are greatly magnified by compounding. The power of compounding can make assets grow much faster. Where most investors make their biggest mistakes are using the wrong vehicles: taking too much or too little risk and paying too much in fees and taxes.
Being too conservative when you invest is detrimental to your wealth. I see many people become so fearful that they invest only in safe, guaranteed vehicles such as CDs, Treasury bonds, and money market funds. As life expectancies continue to rise, so do the probabilities that too-conservative investors may outlive their assets.
Being too aggressive is just as dangerous as being too conservative. Taking unnecessary risks and jumping into investments that are not understood are critical mistakes I see being made on a regular basis.
Too many people jump in and out of the stock markets at the absolute worst times. I see people finally get out at the bottom of the market only to get back in after a major recovery. I had a client that was notorious for his. I would spend hours with Phil. He would call to sell everything as the market was tanking and then call to buy back in after the market had a sharp rise. I had to remind him that the object is to “buy low” and “sell high”. Phil still calls me, but he has finally understood the concept the Warren Buffett describes best, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”
Some of my favorite Warren Buffett quotes:
1. “If past history was all there was to the game, the richest people would be librarians.”
2. “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
3. “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
4. “Only when the tide goes out do you discover who’s been swimming naked.”
5. “Price is what you pay. Value is what you get.”