I’m currently reading the book Wealth by Stuart Lucas and am really enjoying it.
As I approach chapter 6, I want to take the time to reflect on some of the earlier chapters and the topics covered in them because I think they are very relevant to my interests and also the interests of my family.
Lucas is an heir to the Carnation Company fortune. What I first liked about his outlook on finances was that it was one of preserving and growing wealth across generations instead of squandering it all in this generation. It’s certainly a strong counter example to those who are faced with liquidity events that go off and live the high life; ruining it for everyone else.
This book isn’t like normal personal finance books. It hasn’t once spelled out, over the last 5 chapters, how to do any of the typical personal finance things that you see repeated over and over ad nauseam. Things like
- Bring your lunch to work
- Drive less
- Buy a used car instead of new car
- Cancel your cable subscription
- Find hobbies that don’t require spending
- Stop going to Starbucks in the morning for coffee
Recommendations like this are so common among personal finance bloggers these days that they’re boring to read anymore. Why’s that? Perhaps because none of these financial bloggers are members of the ultra-rich. Nor do they have the academic background in finance like some of these crazy successful wealth managers have.
Lucas speaks about money in a completely different way in his book.
One chapter that I enjoyed was chapter 4 where Lucas talks about defining your financial objectives.
In this chapter he presents two different objectives
- The “Distribution-Driven” category of Financial Management
- The “Growth-Driven” category of Financial Management
These two categories are vastly different and the difference between the two is a matter of time horizon, financial acumen, and cooperation. The average person is likely to fit in best with the Distribution-Driven category.
In Distribution-Driven management, your time horizon is short-term; on the order of perhaps 20 years or so. However, definitely not much more than your lifetime. In fact, one of the goals is to have your last dollar spent to cover your burial.
In Growth-Driven management, your time horizon is multi-generational. You strive to grow, and continue to grow, your family’s wealth beyond your and your next of kin’s lifetimes. This takes concerted effort and cooperation amongst you and your family. Resources are pooled. Financial stewards are elected based off their knowledge of finances. In general, I think Growth-Driven management (at the degree I’m reading it) is beyond the ability of most people.
I can certainly see that most people might be able to leave something to their children, but not on the order of what Lucas seems to be describing in Growth-Driven management.
I personally fall squarely in the center of the Distribution-Driven form of financial management. I might leave a bit of scratch to my brothers and sisters, but I have no grand aspiration of building an empire of wealth in my family.
Lucas also re-iterates what he and others have observed time and again when it comes to building that actual wealth for the lay person; indexing wins. Unless you have some significant capital or visionary understanding of financial markets, it’s in your best interest to invest in indexing products; what he refers to as The Capital Kibbutz.
Within the financial industry, he has observed what he calls three “Different Worlds”; the Capital Kibbutz, the Secret Society, and the Enchanted Forest. In a nutshell here are their definitions.
- The Secret Society is a group of visionary wealthy people that have insider knowledge of the financial markets. This is not you
- The Enchanted Forest is where people who think they know something about finances go to lose money. Angel investors, people that claim to be able to beat the market, etc play here. It’s very high risk, and the people playing here have no idea what they’re doing, so they tend to lose their shirts
- The Capital Kibbutz is where the sane people play. It’s the boring, but successful world of indexing. Resources are pooled in indexing tools to better distribute risk. While you may not make a killing here, you also won’t lose your shirt. At best you will “be” the market, but even that is better than investing with active managers that will cause you to trail the market returns after taking taxes, fees, and inflation into account. He suggests, like most of the wealthy do, for the average person to be here.
I couldn’t agree more.
Gambling is addictive, and the Enchanted Forest world is where you hear a lot of financial professionals lead their clients; it’s unfortunate. Indexing really is the least complicated way to build wealth for most people. It takes some time to do it, but most millennials also have a long time to make it work. Additionally you forgo much of the risk that comes with cherry-picking stocks or trying to time market events.
I don’t know anyone that has Lucas’ level of wealth. But I do know a lot of poor people who play in the Enchanted Forest and who could have been retired by now if they had not.
I was first turned on to indexing by my dad who would listen to Bob Brinker’s “Money Talk” on WLS radio. From there I opened a Vanguard account, started reading Bogle’s work, and the rest is history.
My own portfolio was influence by Brinker, Bogle, and if you can believe this Ben Stein. I have a small book by Ben and Phil DeMuth (I forget which one) that sums up a pretty diversified portfolio in the form of two indexes; the Total Stock index and the Total Bond index.
Those two tools made up the entirety of my investment portfolio during my early years. I added a target date fund to the mix when I began rolling over 401k’s from employers as I switched companies.
To this day they’re served me reasonably well. I don’t look at them much more than once a quarter when I will decide whether to rebalance them. During the remainder of the year I just repeatedly add money to them on a fixed schedule; the stock index on the 1st and 3rd weeks of the month, the bond index on the 2nd and 4th weeks.
Over time, that dollar/cost averaging approach has kept the average cost of the shares in the portfolio low and has caused me to buy all the way through both bull and bear markets. I’m not concerned with the price of the stock index like I might be if I owned individual stocks; it’s a pretty cush’ life.
I’m looking forward to the remainder of the book as I hope to read more details about wealth creation and preservation that I can apply to my own life.