I do get feedback from these videos. Here's one from New
"Hi John, I am a recent disciple of your youtube
presentations, in short 'I Luv Em'. My request is: what is
available to read which gives me the basics of how money works
? There are quite a few concepts which you discuss that fly
over my head. Is there an Idiots Guide
I can read to
get the basics of finance."
This isn't something I'm keen to do, for the simple reason
that one has to go back to basics, and most people cant throw
out all the rubbish they've learned over the years, or, they
simply dont think that way. However...
The most important issues in investing have very little to do
with choosing the right investment, but have more to do with
an attitude to money, life, and success. I can try and do
this, but I suspect what I have to say, although fundamental
in understanding how to cope with the financial minutiae of
life, is not going to help. First, one has to remember that
investing is all about financial principles, and in order to
understand them one needs to understand basic maths. Most
people hated maths at school, and have tried to avoid it
throughout life, almost as if it was as bad as visiting the
I have a great many maxims which help me get through life. I'm
never sure which is the most fundamental, but in terms of
investing I guess the most important thing to understand is
the power of compounding.
The most important things to understand about lifestyle is to
start with that great phrase from Villiers de L'Isle Adam:
Living, our servants can do that for us
. That leads one
to ask, who is our most faithful and useful servant? The
simple answer is Money.
I like having servants. I hate doing housework and especially
the washing up. That's why for a large part of my life I do
have servants. Back in the distant past rich people could
afford a whole mansion full of them. These days such a way of
life is part of history. Yet I have servants. I live roughly
half my life in hotels. I dont have to go shopping, cook
meals, do the washing up. I dont even have to make my bed. And
I dont have to instruct the gardeners, or sort out clogged
drains. All of this is done for me. I have servants.
But I have another servant: Money. Let's have a closer look at
this wonderful asset.
First, let's get our definitions straight. What's investing
all about? Answer: creating a store of wealth. And what is the
best way of doing that? Ah, there are several answers to that
question. Let's have a look at some of them.
Let us be sensible though and start by defining wealth.
The simple way to judge what is wealth is to ask yourself if
you can get up in the morning and do what you want to do. Most
people can't. Those who have wealth, can.
When I was at school I looked around me at adults and took the
view that generally speaking they were a bunch of idiots. They
spent their entire lives doing things they didn't want to do,
and in fact, they spent their lives doing as they were told by
other people, and they helped those other people to get
wealth. My take on this was 'How daft can you get?'
If you want to get wealthy you need to be able to do what you
want and at the same time work for your own benefit, not
someone else's. Most people are too timid to do this, so if
that includes you, stop reading and remain poor.
The next thing you need to do is grasp the fundamental fact
that spending money on non-essential goods is not what gaining
wealth is all about, and you will be squandering your most
Wealth does not consist in owning goods. The clever person is
able to use goods. I like flying, but that doesn't mean I go
out and buy a plane. I join a club where the club owns the
plane, and maintains it, but I can use it.
Many businesses have discovered that the best way to make
money is not necessarily to sell things, but to sell the use
of those things. The first company I came across that did this
was Adobe (I use Photoshop a lot, so I discovered this
attitude to the dichotomy of owning/using things early on).
It's a concept that works well for both sides of the
transaction. The provider gets a regular customer and a
regular income, and it helps cut the advertising budget. The
user gets the benefit of the use without having to spend a
large amount of money up front. Let me put that last point
another way. The user doesn't have to part with a big amount
of his faithful servant, money. That means he can put his
servant to work for him.
Let me give you a prime example of how this attitude to money
as servant, and wealth as use-value works. Let's say you buy a
If you are like most people you will not have enough money to
buy a house, so you take out a mortgage to buy the thing,
spend a lifetime paying down that mortgage so you can spend
your declining years not having to buy it. That, of course, is
the way to stay poor.
Next week I will show you the proper way to buy a house if you
don't have enough money to start with, and you certainly dont
go out and get a mortgage.
Let us say you are now over fifty years old and you own your
home. Jolly good. You can now relax. That is, if you dont want
to be wealthy. You now perhaps have £350,000 or more tied up
in bricks and mortar. You own it. But at what cost? That
£350,000 should be your servant. What's it doing for you?
I have a motto. I goes like this. I work hard for my
money, I expect my money to work hard for me.
How many times have I said in my blogs and my books that
owning a home is not very productive. I live in a house that
is worth about €650,000. I could rent somewhere similar for
about €25,000 a year. Since I can put money to work for me I
can easily get 10% return on a dozen or so investments. If you
wonder how, then read my blog on just that topic. Here's the
A 10% return on €650,000 is €65,000 a year. I can take out the
€25,000 to pay the rent. The rest continues to bring me in
€40,000 a year, which I can use to make me even more money,
and somewhere down the line I can spend some of it doing what
I want to do, which, if you remember where this story started,
is what I mean by being wealthy. How about you?
Hold on. Let's back up a moment. I'm sure those of you who do
understand maths may have noted that I missed a trick in that
Let's do the sum again. Since I am paying for my accommodation
by the month it would be more sensible to invest the whole of
that €650,000. The income would be roughly €5,500 a month. You
do realise that I have now effectively found a way to pay my
rent without disturbing my capital at all. In fact I now have
a nice home which is paid for by my servant, and at the same
time that servant is making me an extra €3,500 a month income.
So, in actual fact, by deciding to look at life in terms of
what I can use rather than what I can own, and joining that to
the concept of treating money as a useful servant, I have now
managed to get myself a home that is effectively costing me
nothing, while at the same time producing me an excellent
pension. Oh yes, and I haven't had to dip into my capital.
That €650,000 is still intact, but is represented by something
that is gushing money, instead of something that costs money
to run, and doesn't actually do anything.
Now that's how to become wealthy.
On the other hand, if you are obsessed with owning things,
then stay poor.
Oh yes, and one more point. Ownership? If you have a mortgage,
you rent your house which is owned by the mortgage company. If
you think otherwise then that is one more reason why you are
not wealthy, because you are blind to obvious facts. After
all, who has the deeds? You dont.
Okay, tune in again next week and we'll have a look at how you
buy a house when you have little or no money, and you
certainly dont want to get a mortgage.
I have decided to do a series of these little chats about how
to use money as a servant, and one of my complaints about the
way many countries organise their finances, or rather fail to
organise their finances, will be among those topics. Stay