Wisdom from a Banker: 7 Steps toward Financial Wealth

An anonymous, private investment banker’s observations of people who have, or those on their way to having, wealth:

1.    They ignore advertising and shun the purchase of trendy items. The “must haves” for them are not gadgets and consumer trinkets but “net worth” and “investments.”

2.    Whether innately, or as the result of study, they know the difference between income and principal. Your not understanding this distinction offers the real prospect of your being more or less poor all your life.

3.    They are prepared to walk away from any deal not conforming to their terms. Sensing this, the other party almost always relents.  If you are not careful, spending money can become an emotional event. When passion governs, it seldom governs wisely.

4.    They see the end from the beginning. By this, I mean that they realize, 15 or 20 years from now, they will derive much more pleasure from seeing Ivy League university undergraduate and graduate degrees hanging on their children’s walls than they will derive from making an (emotional) purchase of a car or the taking of a trip to Honolulu and spending $2,000 a night to stay in the Aikane Suite of the Royal Hawaiian Hotel. They’ll get to the Royal Hawaiian all right and in due time, but you will pay for it. See #5.

5.    They are attentive to their surroundings and to the behavior of other people. They see the (almost always) bad habits of others and deploy their capital so as to profit from the reinforcement of those habits. They buy the stocks of companies selling tobacco, alcohol, consumer electronic gadgets and do-dads, entertainment, and luxury items and thus turn your income into their principal. See #2 above.

6.    They buy the stocks of companies providing health care and medical devices to insure a future steam of profit from the day when the bad habits of others truly catches up with them.

7.    By the time they are 40-50, they have or are well on their way to having strong balance sheets. Their wants are few. Why is this so? It is so because only people without money will struggle to pay for things they in fact do not need and cannot afford. The more you can afford something, the less willing you are to pay for it and, consequently, as the night follows the day, the better the deal you get on anything you do buy.

I close with another quotation I read on a fortune cookie: If you don’t change direction, you’re likely to get where you’re headed.

These observations will help at least some of you. The painful truth is that those are likely the ones who didn’t need to read them.