Building wealth is a skill. To prove the point, a study of 10,000 millionaires was conducted between 2017 and 2018. 79% of those participants never received a single dollar of inheritance in their lives. 69% averaged less than $100,000 in salary over their careers. So, what was the key to their affluence?
It turns out consistent, deliberate investing and healthy money habits are the secret sauce to becoming wealthy. Pair that with the parabolic growth of a nascent industry, and making money becomes inevitable. Creating a framework around these practices will set you up for investing success.
The basic principles of investing are centuries old. The entire purpose of investing is to allocate resources with the expectation of higher returns in the future. Below is an exaggerated story that drives this point home.
The Burning Village
The year is 800 BC, and a once thriving village in the middle of nowhere is experiencing a drought of unprecedented duration…
A haunting scream ripped through the blistering, motionless July air. Another hellish reminder that my heart still beats. I peeled my sticky, naked body from the bed and rubbed the crust from my tired eyes. Looking out the window, under the shade of a barren tree in the distance, I saw my only child being eaten alive. How fast we all revert to our animal instincts when faced with survival.
Pants on and bow in hand, I quickly made my way across the arid landscape of my once proud estate. Against the cracked, leathery skin on my back lay my quiver. I counted six shots. I only needed two. From 30 yards out, I drew back the thick linen bowstring. The arrow soared like a peregrine falcon, a blessing in disguise for my baby boy. One more arrow snapped through the palpable summer heat, and I released the assailant from this prison on Earth.
I walked closer, swelling with grief, but I dared not shed a tear. Swimming in my emotions would have undoubtedly led to drowning. With the crunching sound of dead grass beneath my feet, I dragged my beloved wife and child back home.
The erratic behavior of the villagers must have started somewhere between the rivers running dry and getting down to our last bags of beans. A quarter of our population committed suicide. Another third ate the diseased corpses of the recently deceased. Still, those who remained believed that life would improve.
Then one day, a group of nomads wanders into the village as if by magic. Chunky with supple skin, the nomads did not seem to be suffering the ill effects of lacking sustenance. They claimed that they knew where a secret abundance of water was. Better yet, they claimed they could make the water flow to the village for generations to come. The water would bring food. The food would bring life. They only asked for two weeks’ worth of beans and water rations and 10 pounds of gold to get the job done. It would cost us everything.
I wrestled with the thoughts that rolled like the ocean deep inside my head. “What if the nomads are lying and never fulfill their promise? What if the project fails? What will we do to sustain ourselves while we wait?” In the best-case scenario, the nomads were people of integrity. They would do the necessary work to bring water to the lands – allowing our village to prosper again. Regardless of my apprehension, we would perish if we didn’t agree to the deal. So, as the leader of my people, I accepted the nomads’ terms.
The villagers and I reluctantly packed everything we had onto the nomads’ ox-drawn carts–golden trinkets, coins, bars, embroidered clothing, tools, bags of beans, and water pouches. As quickly as they had come, the nomads vanished into a brown cloud of dust with our belongings. With them went the last of our hope. What remained were empty houses that we once called homes, and if we rationed every drop, exactly a week and a half worth of water to sustain us all.
Unlikely Heroes and New Beginnings
Long story short, the nomads were highly successful businessmen and scholars. They knew of a massive, hidden lake at the top of a mountain, perpetually filled by melting snow and ice. The nomads use their unique knowledge of irrigation to have this water tunneled directly into the bone-dry rivers that cut through our village. They allocated the village’s wealth to hire skilled labor, purchase specialized tools, and rent additional oxen to complete the venture and pay themselves. The deal paid off.
I took a risk that led to saving all the villagers. A single decision that allowed future generations to thrive unencumbered by the thought of famine or dehydration. Furthermore, the investment deal created an everlasting relationship with the nomads, who frequently brought new technologies and teachings. In time, the dying village became a mecca for global trade and innovation.
The same idea of this story lives on today…even if the stakes and potential outcomes are a little less extreme. Investments, most often in the form of money, are made in companies and individuals. Those companies and individuals then go off on ventures that should theoretically bring value to the world. If they failed, the investor would most likely lose everything they invested. On the flip side, if the venture is successful, the investor gets to share in that success.
Early Stock Trading
Early investing had no stocks or shares. However, many different types of business-financier partnerships were income-producing. Some of which still exist today.
LLCs and Corporations
The East Indies and Asia were magnets for foreigners searching for riches. Before the 1600s, it was common for ship owners to seek out investors to pay for voyages to these new lands. In return for crew members and resources to make the trip, the investors would share the fortunes the crew would bring back.
The risk? Intense weather destroyed ships, pirates robbed and killed crewmembers, and sailing inexperience ensured that many voyages were unsuccessful. A one-time agreement would be drafted between the parties in the form of a limited liability company (or LLC) that outlined the deal’s scope. Investors would spread the risk by investing in many voyages at once.
In the 1600s, the Dutch, British, and French governments gave official charters to shipping businesses that voyaged to the East Indies and Asia, better known as the East India Companies. These charters fundamentally changed the relationship between investors and the companies they funded.
A charter is a document that explains how a company will operate, its structure, and its objectives. The charters also allowed the companies to issue stock (or partial company ownership) for the first time.
Represented as sheets of paper, stocks held (and still hold) a tremendous amount of monetary power. At the time, certified stockbrokers and investors would meet in coffee shops to conduct trades. The orders would be posted in the shops and physically mailed as newsletters. The brokers would pay proceeds from voyages in the form of dividends. These dividends were made available to holders of the company stock and paid in proportion to the number of stocks held.
Chartered companies, or corporations, could experience tremendous growth from this innovation, as it was easier to have longer-term relationships with more investors. As the corporations’ coffers grew from raising investor funds through stock sales, they expanded their fleet of ships and subsequently were able to charge higher prices for the stocks they sold. Royal charters also forbade competition, meaning that these early corporations were government-backed monopolies. Investors were making money hand over fist.
In the 1600s, there were no rules surrounding the issuance of stock shares. In the market hysteria, corporations raised vast sums of money before they even sailed a single ship. Corporate executives lined their own pockets and began living lavish lifestyles.
However, investors became worried when The South Sea Company could not pay dividends. Stock prices quickly declined in value, and some company valuations never recovered, meaning the investors lost their money. The financial meltdown caused the English government to ban the issuance of stock shares through 1825.
Traditional Stock Exchanges Today
In 1792, under the canopy of a tree on Wall Street in New York City, the New York Stock Exchange (NYSE) was created. In the heart of the finance and business center of the United States, the NYSE grew to prominence quickly and soon surpassed the size of other existing stock exchanges in the country and abroad. Also, having stricter listing requirements for companies made the NYSE appear more prestigious to investors.
Over time, strict government regulation began being implemented in the wake of large market crashes that impacted global economies. An activity reserved for the rich, investing should not have affected the bank accounts of everyday citizens. However, in 1929 the Great Depression wiped out many people’s savings. This was due to banks gambling in the stock market with depositor funds and other risky practices. While speculation is a natural consequence of a free market, institutions like the SEC were built to bolster investor protection from fraud and market manipulators. With the onset of modern technology, stock shares also began being traded electronically around the globe.
- Beattie, A. (2022, March 14). The birth of stock exchanges. Investopedia. Retrieved May 16, 2022, from https://www.investopedia.com/articles/07/stock-exchange-history.asp
- Kenton, W. (2022, May 2). Understanding joint-stock companies. Investopedia. Retrieved May 16, 2022, from https://www.investopedia.com/terms/j/jointstockcompany.asp
- Ramsey Solutions. (2018). THE NATIONAL STUDY OF MILLIONAIRES.
The history of NYSE. The History of NYSE. (n.d.). Retrieved May 16, 2022, from https://www.nyse.com/history-of-nyse