I have had a rather turbulent relationship with Money since I started earning some.
I grew up knowing Money was something hard to get, and therefore always scarce. It was something you woke up early and went to bed late looking for, yet somehow never quite managed to have enough of.
That is what my Parents modelled.
When I started earning my own Money, my first assignment was to add to the family pool, so that my Parents would have a little bit more, and hopefully complete the education of my siblings.
It was a noble thing, but it also got me firmly into the rat race.
It would take me years to realise that I had inherited a particular way of thinking about Money.
Money was the Master, and we were its servants. We went where it dictated we go. We worked as hard as it demanded us to. Money didn’t seek us. We sought it, and it didn’t make it easy for us to find it.
The richest person I knew growing up was an Uncle who owned a car. Cars were rare in the countryside, so owning one was a major testament to your cosy relationship with Money.
He dressed well too. He always seemed to have new shoes or a new coat, and walked with a swagger that suggested that he and Money were friends, not Master and Slave.
Naturally, I was curious.
I asked my Mother what he did for Money. She told me he worked in Nairobi, in a Pharmacy. He also owned a large tract of land in Nakuru, where his wife farmed.
It would be years before I was grown up enough to work out the economics of my Uncle’s wealth, which was actually quite simple.
- Uncle made his Money in Nairobi as a Pharmacist.
- He sent some of that Money to Nakuru.
- His wife turned it into farm animals, crops and trees.
- Those assets produced more things that could be sold at the local Markets, which produced more Money.
- They then put some of that Money back into the farm.
The rest was evident in their nice House, the car, and the children who went to fancy schools.
My Dad, on the other hand, was a Civil Servant with a stable income. The Money he made went to my Mom, who split it between household expenses, school fees and everything else a growing family needed.
A little went into her Shop. That Shop, for as long as I can remember, was barely breaking even, mostly sucking in more than it gave back.
My Mother worked at least 12 hours a day in that Shop for over 30 years, before as a family we eventually agreed that it was no longer worth keeping open. After work, my Dad would relieve her so she could come home and cater to us, while he pushed on up to as late as 10pm. The next morning he would be up at 5am to prepare to go to his Teaching job.
Looking back, there was a fundamental difference between my Uncle and my Dad.
Both worked hard, both earned Money, both were trying to earnestly provide for their families. But, they had created very different engines for turning their Income into Wealth.
My Dad’s Income mostly went into sustenance, with a little going into an unprofitable business, while my Uncle’s Income went into a venture that had already demonstrated its ability to produce more than it consumed. My Dad was an earner. My Uncle was an Investor.
That distinction has stayed with me, particularly after I read Rich Dad Poor Dad by Robert Kiyosaki.
An Investor thinks differently about Money.
Money is not simply something to earn and spend. It can also be deployed as a tool to create more value and, hopefully, more Money.
Investors think in terms of Risk and Return. They look at different opportunities and ask: What could I gain? What could I lose? What do I know about this particular opportunity? What is the likelihood of each outcome? How long will my Money be tied up? And what happens if I am wrong?
Despite all this analysis, Investors still lose Money. A successful Investor doesn’t have to win every time though. They only need their gains to outweigh their losses over time.
Sophisticated Investors also understand that Risk can sometimes be reduced or transferred through things like diversification and insurance.
This is where my own family history gets interesting.
My Dad actually became wealthy quite early in life. By his early thirties, he owned multiple rental houses and a large tract of farmland, largely financed through bank loans against his teaching Income.
Then something unprecedented happened.
There were tribal clashes in the area of Kenya where we lived. We had to leave everything we owned and escape overnight. I have written about that experience here.
None of my Dad’s subsequent attempts to reclaim his past glory quite worked out, and that became the financial reality I grew up into.
Looking back, I can now see something I couldn’t see as a child.
My Dad had accumulated significant wealth, but much of it was concentrated in a relatively small number of physical assets in one geographical area.
When that geography became unsafe, the value of those assets became almost irrelevant to the family that had owned them. It was one of the most painful lessons I would eventually learn about Risk management.
Years went by, with enough Money mistakes to go with them. Exposure to other examples reminiscent of my late Uncle, combined with intentional attempts to educate myself on how to master Money, eventually led me to three simple discoveries about how to Think Like an Investor.
1. Start Close to Home
The first Money you turn into an investment should ideally go into something you understand, not something that looks sexy, or something your friend says is the next big thing.
I know someone who works in HR who decided to invest in a Petrol Station. It sounded like a great business, except he couldn’t make head or tail of the economics of the venture. Eventually, the Petrol Station siphoned away a significant portion of his Money before he humbly shut it down.
My Uncle and his wife had a different advantage.
They grew up around farming. They understood livestock. They understood crops. They understood the seasons, the Markets and the risks. Their first investment was close to Home.
That doesn’t mean you should only ever invest in what you already know.
Part of growing as an Investor is expanding your circle of competence. Before you understand how the Money is supposed to come back profitably, and how you could lose it, you probably shouldn’t be putting your Money in.
2. Spread the Risk
This is one of the oldest rules of investing. Don’t put all your eggs in one basket. My Dad’s experience taught me this one the hard way.
When most of your wealth is concentrated in a particular asset, business, geography or source of Income, one unexpected event can wipe out a disproportionate amount of what you have built.
Diversification doesn’t eliminate Risk, it simply makes it less likely that one bad outcome destroys everything.
And this applies beyond financial Markets. Your career can be a concentrated investment, so can a business.
The older I get, the more I appreciate that Risk management isn’t about expecting nothing to go wrong, but rather about making sure that when something does go wrong, you survive it.
3. Make Time your Friend
Money and Time are great friends, because Time gives Money the opportunity to compound.
Every extra shilling you invest today has the potential to generate returns, and those returns can themselves generate returns, and so forth.
Your Money starts having Money babies, and given enough Time, those babies start having babies too. This was one of the most pleasant financial surprises of my adult life.
During a recent hard turn in life, I had to go back and liquidate a financial asset I had been slowly putting Money into for nearly eight years.
I had almost forgotten about it, and I wasn’t expecting much. When I saw what what it had silently become, I was pleasantly surprised. The Money had been quietly doing its thing while I was busy doing mine.
That is the beauty of Time.
It can make small, consistent actions look insignificant in the present and remarkable in retrospect.
This is why I have become increasingly convinced that the time to start Thinking Like an Investor is not when you start earning a ton of Money.
It is before your first pay cheque. You don’t need a lot of Money to develop an Investor’s mindset. You need to learn to ask a different question about every shilling that comes into your hands, which is “What job can this shilling do for future me?”.
This is because the first shilling you ever make is not really about the amount, but rather about the relationship you establish with Money. You can spend it all. You can hoard it. You can fear it. You can serve it, or you can learn to put it to work.
I started teaching my Children to think like Investors from the moment they could count. I’m presently their Fund Manager for the little Money they’ve earned through gifts and small Money-making projects here and there.
I didn’t get this teaching as a child of working Parents, and had to learn it the hard way. I am still learning.
I no longer let Money to be my Master, but do my best to be a better Steward of it. That, is the key to Thinking Like an Investor.
