Transforming personal finance since 2011

#78 — "First Principles..."

October 20th, 2021

By Andrew Craig

Reading time: ~ 18 minutes

It has been quite a while since my last article.  As I explained in that piece, I quit my day job back in May to go full-time on all things Plain English Finance.  Since then, I’ve had my hands reasonably full working on several key initiatives for the business, the details of which I look forward to sharing with our readership in the reasonably near future. 

Many readers already know that two of those initiatives are the delivery of a teen- and young-adult version of my first book How to Own the World and a new book on how exciting the biotech industry is, working title:  The Future Is Biotech.  The fact that Rachel, the kids, and I also had to find a new place to live and move house since the last time I wrote has also kept me pretty busy in the last few weeks.  Anyway - I have been determined for “normal service” to be resumed for a while – in terms of me writing more or less regular topical articles at least. 

I thought a good way of “re-joining the fray” today might be to pen something as a reminder of the most fundamental elements of what we do – our “First Principles” if you like.  So here goes…

It’s all about financial literacy…

Our stated company mission is “to improve the financial affairs of as many people as possible” …and we are deadly serious about that statement.

This mission is a reaction to the fact that effective financial literacy is still extremely poor all over the world – and particularly in the UK where far too many people hold incredibly unfortunate and limiting beliefs about such things in my view.  There is a deep suspicion of money and financial markets amongst the general population in our country, perhaps as a legacy of the British class system:  Money is “the root of all evil”.  “Cash is King”. “The stock market is a casino.”  These are all incredibly unhelpful and anachronistic things to believe, and I think it is time that British society in particular realised this, not least given how much better off we could all be.  

Importantly, this isn’t something that is “a bit of a shame” or “mildly disappointing”.  In our considered opinion it is one of THE biggest challenges faced by modern society, and all over the world, not just in the UK.  Truly.  This stuff really is that important – and never more so than today because a widespread improvement in financial literacy could be the solution to many of the biggest problems most people face as individuals and, again, by extension – the solution to many of the problems we face more broadly as a society, and which fill our newspaper headlines more than ever.

Happily, we aren’t the only people making these points.  Only last month the Financial Times launched their “FT Financial Literacy and Inclusion Campaign” or “Flic” - which is being ably supported and articulated by voices as diverse as the Economist Annamaria Lusardi and even the rock-star and ex-wife of Kurt Cobain, Courtney Love.

Silver Bullets

I have said it before, but my strong belief is that widespread effective financial literacy can be a kind of “silver bullet” – for individuals, and, more broadly, for society as a whole. 

I made this case in How to Own the World, but at the individual level, every person who learns enough about financial markets to become properly financial literate and optimise their financial affairs as a result, very significantly increases the chance that they will become wealthy – and almost no matter how much they earn, over time at least.  This is obviously fantastic for the individual concerned.

This reality then has two powerful knock-on effects for society more broadly, however:  First, every person who does this is then likely to need far less state support – for them, and for their dependents.  Secondly, by virtue of becoming investors, they are then helping to provide capital for companies up and down the land who are helping solve real human problems and / or deliver human wants and needs.  I’ve spent much of the last seven years trying to raise money for small, innovative British biotech companies.  This is an incredibly hard thing to do, in the main because there is far too little capital available to support those kinds of companies.

A depressingly small number of British people know anything at all about financial markets or make use of them in an effective way.  This makes their lives immeasurably harder than they might otherwise be.  It is also a massive challenge to our national balance sheet and to companies who need capital to do any number of fantastic things.

I am absolutely convinced that if even “only” a million or two more people became effectively financially literate, this would have enormous second order benefits for British society as a whole – and would be a far more effective way of delivering a massive improvement in the UK than any government policy ever will.  I believe that the same holds true all over the world, not just in the UK.  This is what I mean by a “silver bullet” for society as a whole – and is why we have a sense of mission about what we do.

…so – to some of our "First Principles" when it comes to this subject matter:

Eight “fundamental truths of finance”

In my first book, I provided a list of what I called some “fundamental truths” of finance.  I argued that:

  1. No one is better placed than you to make the most of your money.
  2. You have significant and inherent advantages over many finance professionals.
  3. Making money from your money (investing) is far easier than you’ve always thought. If you managed to learn how to drive, you can look after your money. It is no harder.
  4. You can make far more from your money than you ever thought possible.
  5. It is realistic for you to target making more from your money than from your job.  This is the money “secret” understood by virtually every rich person in history.
  6. Achieving the above is possible almost no matter how much you currently earn.
  7. The good news: doing this today is easier than ever before. The tools available to you are the most powerful and the cheapest they have ever been.
  8. The bad news:  it has never been more important to take charge of your financial affairs. If you are under the age of about 50, there is no chance that you will receive a government-funded pension you can actually live on after retirement.

I then went on to talk about “two amazing facts about finance” and to suggest “two crucial investment themes” that people might consider. 

Two Amazing Facts about Finance

As a reminder, the first “amazing fact” – was the power of compound interest,  something that Einstein described as “the eighth wonder of the world”.  I showed how £5,000 invested on the day a child is born could turn into around £1 million by the time they could first take their pension at the age of 55, with no further investment.  As I said in the book:

“…if a grandparent or wealthy relative were to invest £5,000 the day a child is born, and that investment were to achieve 10 per cent per annum until the child retires, with no further investment at all, that initial sum would have grown to around £1 million by the time the child turned 55 (£945,000 if you calculate it as 10 per cent annually, or around £1.2 million if you compound monthly at 0.83 per cent – that is, 10/12)…”

Of course, a 10% return may seem ridiculous to many people, particularly with interest rates below 1% at the moment - until you consider that the US stock market (by which I mean the S&P) has averaged not for off that number since 1872!  There is a great deal more to it of course – particularly the importance of the volatility of those returns - something I have written about extensively - but the broad point is that stock market investment over a very long period of time can deliver outcomes that most people still have no idea are even possible.

My second “amazing fact” – was that today, anyone can get access to financial products, services and information sources that are better than ever before.  As I said: 

“…in the relatively recent past … the financial services industry has developed to the point that people from any background can invest in almost any asset class in almost any country and can do so easily, quickly, cheaply and, in the UK in particular, tax-efficiently too...”

Again – far too few people are aware of this reality or are making use of it.

“Two Crucial Investment Themes”

I then went on to highlight two crucial investment themes.  These were: 

First, the fact that the world economy keeps on growing.  As I said in the book:

The world is much richer today than it was ten years ago, and certainly much richer than it was 20, 50 or 100 years ago. In fact, the last decade has seen humanity produce something like 25 per cent of all economic output ever in the whole of human history. It seems rather incredible that at the same time that this cornucopia of wealth has been created, so many people in the developed world feel that the world is the worst it has ever been.

Humanity, in aggregate, is the richest it has ever been. And the world will continue to get significantly richer due, quite simply, to population growth and economic and technological development.

Secondly, that there is significant real inflation in the world.  Again, as I wrote in the book:

In recent years, governments all over the world have been inventing vast quantities of what I call ‘fictional’ money. I use the word ‘inventing’ rather than ‘printing’ because very little of this new money is actually printed as notes or minted as coins; it is simply ‘invented’ in computers. All this new money creates inflation.  It is vital to know that this is happening and understand what to do about it.

This was why the book was all about "owning the world".  If you "own" that economic growth and that inflation, you are best-placed to do well financially.

Economic Growth is All About Human Progress

On the economic growth point, in the time since the publication of How to Own the World I have started to describe this as the fact that:

…human progress is the greatest investment theme in human history.”

I have made this point, with accompanying evidence, in a number of talks I’ve given in the last few years.  If you’re interested in the detail here (it is exciting and uplifting stuff IMHO), please do check out this presentation that I gave to the London Financial Services Club in 2020.  The most relevant section starts at 14 minutes 12 seconds.

This human progress point was also a key area of focus in my second book: “Live on Less, invest the rest…” (as a reminder, you can get free e-book and audiobook  versions of “Live on less” by joining more than 600 other lovely people in our online Community).

These “Fundamental Truths”, “Amazing Facts” and Crucial Investment Themes” were the “First Principles” to be found in How to Own the World.

…and they are all as relevant today as they were when we published it nearly ten years ago. 

In the time since then, however, we have developed things a little further:

“Live on less, invest the rest…”

In July 2020, we published my second book.  As we explain on our website and on the Amazon page for the book, Live on less, invest the rest... picks up where How to Own the World leaves off.

We describe it as a workbook because it is meant to be used as a companion text to our online Community. The book is the evolution of a document called the “Complete Guide” which members of our Community have received for free on joining the group since we set it up in 2014. In that time, we have been able to see all the various questions and concerns that are most regularly raised by our members.

“Live on less…” was a reaction to those questions and an attempt to summarise the answers as succinctly as possible in one place.

Another "First Principle"

…and if I were to extrude one overriding new “First Principle” that came as a natural function of producing “Live on less…” – it was for us to clarify a very key difference between us and much of the rest of the financial commentariat:

…we are all about INVESTING, NOT about TRADING…

When I make all the points I have made above about how transformational financial literacy can be for people and for society, I’m talking about people learning how to INVEST, NOT learning how to TRADE.

This is a very, very important distinction and certainly another one of the “First Principles” that I want to get across in this article.

We believe that investing is for absolutely everyone, no matter your background or level of education or income.  We believe that trading, on the other hand, is almost certainly only appropriate for a very small proportion of the population.  We spend a great deal of time making this point.

As I say in “Live on Less”:

The main reason we hold this belief is quite simple:  Becoming a good trader and / or investing in individual companies, currencies, markets and so on, is incredibly hard and incredibly time consuming.

First: You need to learn the skills required to do it well. I would say that the work required to become a half-decent trader and do it properly so that you have enough skill to stay safe when you do, is at least an A-Level’s worth of study, at best. It is actually probably more like a degree’s worth before you will get properly comfortable and consistently good - and, even then, there is no guarantee you will ever get there given how much knowledge and discipline is required to do it well.

Secondly: Even once you have put in that initial work - the amount of time and effort required to actually do any kind of trading and succeed at it on an ongoing basis is also very significant - prohibitively so for most people - particularly busy parents for example. Don’t believe anyone who tells you it “only takes five minutes a day”. It might take them five minutes a day after years of practice but that will not be true for any beginner – not to do it properly and actually acquire sufficient skill to protect yourself from the risk of losing a lot of money at least.

Thirdly: Unless you have significant net worth in terms of liquid assets and cash, you are not going to be able to deploy enough capital at a low enough risk to make all this extra work and time spent staring at screens worthwhile in absolute terms. Far too often people who have very little money go straight to things like crypto and currency trading, completely bypassing doing the best with things like their savings, ISA and pension arrangements. To me, this is a bit like someone with a white belt in karate or judo fighting black belts on day one of their martial arts journey – very likely to result in you getting hurt.

Fourthly: Trading and crypto services are also invariably very expensive on the basis that they promise “life-changing returns”. To me, there is no worse a rookie mistake than someone with e.g., £3,000 of savings paying some un-regulated “guru” £1,000 of that to “learn trading”. It is my very firm belief that you will be far better off spending your time on things that earn you money and saving and investing (not trading) 10% or more of those earnings for many years until you have much, much more than a few thousand pounds.

It is for these reasons that SO many people fail at this, it is a completely inappropriate activity for the vast majority of the population and so many trading educators, whilst sometimes teaching viable skills (the best of them at least), don’t actually help people improve their finances in the real world.

Simple, regular investing by direct debit into a fund or funds that are sensible is a vastly better idea. This is also a set and forget approach to succeeding which only really needs to be looked at again every five or even ten years to have a massively positive impact on your chances of becoming wealthy.

When you then become sufficiently wealthy - let’s say in your thirties, forties or fifties realistically, depending on how early you start - that is the time that you might deploy some of that wealth into trading strategies, single stock investment or crypto.

I think that these arguments are very poorly understood, particularly with the explosion of interest in all things financial on social media channels like Facebook, YouTube and TikTok recently.

It is great that more people are taking an interest in finance.  I think it is actually something of an unfolding tragedy, however, that so many of them are taking an interest in the wrong kind of finance - and all too reminiscent of times like the dotcom boom of the late 1990s.

Our approach and our world-view are based on the fundamental financial building blocks that everyone should put in place.  This is philosophically very different from what too many people are doing at the moment – deciding it is time to sort their finances out and then going straight to an approach which I believe makes them "white belts fighting black belts" as it were.

People are perfectly entitled to go down the rabbit-hole of trying to trade, if that is something that excites them, but we think it is desperately important that more people do the "boring" stuff first:  Sort out the most basic financial accounts such as ISAs and Pensions and do the admin required to ensure those accounts are doing something sensible and meaningful for them.  Over time, the evidence is that this approach has a far higher chance of success than the higher risk things that far too many people are doing at the moment.  Of course, doing the boring stuff is also an approach that has a far higher chance of success than what so many other people do when it comes to their finances - nothing at all!

A call to action...

If any of the above resonates with you - then we would invite you to do two things:

First - EVANGELISE!  Whilst we don't for a moment want to risk turning people into awful "dinner party bores" on the subject of finance, if you agree with us as to how important this stuff is, please do consider gently prodding your friends and family whenever appropriate.

All too often we hear members of our Community and our wider audience tell us that they've tried to get their friends to understand how important this subject matter is, especially given how genuinely (and thrillingly) life-changing it can be too.  Depressingly, more than often than not their loved ones' reaction has been to roll their eyes and tell them to stop being "so boring".  Or to acknowledge that they really do need to do something about it but then take no action, month after month and year after year.  

This reality notwithstanding, we always say that you may as well keep trying!  One of my favourite quotes of all time comes from US President John F. Kennedy when he said:

"Ask not what your country can do for you. ​Ask what you can do for your country..."

As I've written above, I really do believe that this stuff can make a huge difference to the quality of the society we live in.  Help us spread the word!  Perhaps just share the work being done by the FT's FLIC campaign that I mentioned above?

Join us!

Secondly - please join us! 

If you haven't yet done it, and feel like it may be time to take some relatively simple steps required to get your financial house in order, then please do consider joining our Community.  Yes - we have a commercial motivation for suggesting this, but we don't think we're asking that much given that membership is charged at £5 a month.  We like to think that ours could be the best value Community of its kind in the UK.  Is improving your finances worth the cost of a pint or a couple of coffees each month?  We think it is, not least given the resources you get on joining, live events, guest speakers and, most importantly, the support of hundreds of other good people on the same journey.  Ultimately that's the whole point of it...

Join now (from £5/m)

I think that's enough for today.  In my next article I will do my best to deliver my long overdue piece on crypto, not least because so many of you have asked for it.  Specifically, I will look at where it fits within our world view, given everything I've said today about our own particular focus and set of first principles.

Until then - I wish you the very best with your finances and with everything else besides...