The philosopher George Santayana once said, “Those who cannot remember the past are condemned to repeat it.”
The century of financial history we have to work with has provided you with a treasure trove of lessons. These lessons tell you what works and, just as importantly, what doesn't work. Both lessons are equally valuable.
In investing, little things make a big difference. And as you'll learn from this book, financial success for most people isn't about that once-in-a-lifetime coup. Instead, the key to financial freedom is to find a disciplined, repeatable process, based upon empirical research and the historical record. Then, you must have the intestinal fortitude to stick with that process through good times and bad.
And therein lies the Great Challenge. In a world of constant change, how do you stay the course? How do you ignore the hype about the next great investment? When times get tough, how do you know if you should hold steady to the path you're on or change and adapt your approach?
The reality is that in attempting to navigate your way toward financial freedom, there are two things you must get right.
First, you must identify and implement an approach that will work for you. Ideally that approach will be based upon empirical research and the experience of others. Most importantly, that approach must fit well with your personal goals, constraints, time horizon, and risk tolerance.
Once you've identified your approach, the second thing you must do is ignore all the insanity going on around you and stick to that approach. You must also continue to evaluate what you're doing and tweak it as necessary. Notice that I used the word “tweak” as opposed to “abandon.” By the way, the dictionary definition of “tweak” is “improve (a mechanism or system) by making fine adjustments to it.”
This is an important distinction because, once you've identified your approach to your finances, one of the biggest risks you face is abandoning that approach. Of course, this presupposes that the process you plan to use is a sound and logical one.
The good news is that history provides clues about the best way to find just such a process. So, rather than fumbling through the darkness like some ancient explorer in search of El Dorado, you can instead learn from and assimilate the lessons of the past and let those lessons guide you to the Golden City.
Therefore, the first goal of this book is to teach you an approach that will give you a high probability of attaining financial freedom. Importantly, this approach will be free from hyperbole or speculation and will be based on sound financial research.
If you consistently follow the approach laid out in this book, and you do so over a sufficiently long period of time, you are virtually certain to attain a degree of financial success greater than the majority of the general population.
Of course, you'll need to keep in mind that financial success is a relative term and expectations should be realistic. What might be attainable for someone earning a million dollars a year may be unattainable for someone making $50,000. The goal is to attain a significant level of financial success relative to your means. For many folks, this means they are able to live a lifestyle in retirement comparable to that which they enjoyed while working.
Always remember that with the power of compound interest, which Albert Einstein reputedly described as “The most powerful force in the universe,” time is the ally of the patient investor.
Ultimately, identifying and implementing a process designed to produce financial success really isn't that difficult. Even relatively novice readers of this book, should, upon its conclusion, be able to design and build a system that will allow them to embark upon the course to financial freedom.
And that, dear reader, brings us to the second goal of this book. And that is where the trouble often begins. Staying the course and sticking with the approach you've identified can be incredibly difficult, especially in a world of information overload and political, economic, and financial turmoil.
On the surface, this shouldn't be the case. After all, the approach you're implementing is based on sound fundamental research, has logic on its side, and has worked for millions of people just like you.
“But wait,” I hear you saying. “Weren't things different way back when? So maybe this approach worked 10, 20, 30, or 40 years ago, but things are different now.”
And you're right, things are different these days and those who suggest otherwise are either deceiving you or themselves.
For example, we now have the threat of war in the Middle East or with North Korea or maybe even someday with China. And this certainly is different, because in the 1960s we had war with Vietnam and in the 1940s war with Germany and Japan. And yet this approach worked during those time frames.
But now, we have the risk of weapons of mass destruction in the hands of terrorists and surely this makes things different. And you're right, it does. Because for most of the twentieth century we were worried about Russia's WMDs, rather than terrorists' WMDs. And yet this approach worked during those time frames.
Surely, though, the political uncertainty we face is unprecedented and we need to change our approach because of that. I mean, presidents even get impeached these days. And you're right, the political uncertainty we face is different than that which we faced in the past. For instance, I'm virtually certain Richard Nixon will not resign the presidency in the next several years. Nor do I think that adults of any gender, race, or creed will have to once again fight for the right to vote, as they did for so much of the twentieth century. And yet this approach worked during those time frames.
But, who knows what will happen with the economy? Maybe inflation will accelerate. It might, yet I tend to think we are unlikely to see the double-digit inflation that we saw in the 1970s. And yet, even if 1970s hyperinflation comes to pass, remember that this approach worked during that time period.
These days, markets are more volatile and prices swing much more quickly. So maybe this approach worked during times of relative calm, but it can't work now. Maybe, maybe not, but it worked in 1987 when the stock market fell by nearly 25% in a single day. And it worked in the early 2000s when the stock market got cut in half. And it worked again in the late 2000s when the stock market again got cut in half.
And of course, now we have the COVID-19 pandemic, and shelter-in-place, and we've never had anything like that before. And its true; we've never had COVID-19 before. But we did have the Spanish Flu in 1918, which infected roughly 1/3 of all the people on earth, and is estimated to have killed more than 50 million people. And yet, this approach worked back then.
Let me be clear: I have enough experience that I can speculate about what the future might hold, and sound intelligent doing so. But I absolutely cannot claim to know with reasonable certainty what is actually going to happen next week or next year or next decade. The world will change. Politicians will come and go. The economy will experience periods of growth and times of recession. Sadly, we likely haven't seen the end of war in our lifetime. And we will definitely see both bull and bear markets. Of all this and more I am certain.
There is one more thing of which I am also certain. And that is the following: an intelligent and well-researched financial approach, such as the one laid out in this book, will continue to provide a high likelihood of success, provided the user has the intestinal fortitude to stick with it.
The bad news, as you'll soon discover, is that financial success takes both time and discipline. Few people get rich quickly or by accident. And of those that do, few stay rich.
Discipline will prove especially important, because there is a wide assortment of distractions intended to divert you from your steady approach. These developments urge you to do something, rather than just patiently following the disciplined path you are on.
Let's face it, slow and steady isn't always a lot of fun. After all, the tortoise might have beaten the hare in Aesop's Fables, but that turtle didn't exactly run an exciting race. Remember, however, that done correctly, the goal of investing isn't supposed to be excitement. The goal of investing is supposed to be success. And then, once you've attained your financial