Monday, January 6, 2020

Get rich slowly: the power of patience

Patience makes you rich.  I tell this to my kids, my students, and anyone else who will listen.

The theory is simple.  If you have a low discount rate, it means that the future is almost as valuable as the present.  For example, a "patient" person with a discount rate of 5% is willing to invest $100 if she can earn $105 in one year, a relatively low threshold for investing.  In contrast, an "impatient" person with a discount rate of, e.g., 30% is willing to invest only in much more lucrative investments, i.e., those earning at least 30%.

The difference between the two is that the patient person will make more investments (those with a return between 5% and 30%) which will make the patient person rich.  Patient people invest more in education, smoke less, exercise, and watch their weight.  These activities all demonstrate a concern with the future, at the expense of the present.

 Here is some new evidence:
Patience boosts wealth by much more than marriage or religion. Respondents with discount rates more than one standard deviation above the average of the sample had 29% less net wealth, a loss of around $130,000. More impatient people—similarly controlling for religion, income, race, sex, optimism and education—were more likely to smoke, drink excessively, and miss out on their flu shots and medical examinations.

The title of this blog post is stolen from colleague Bill Spitz's terrific book

9 comments:

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  2. Everything is possible in slow and steady way, but if we try to fast forward anything and I mean anything then we will only make it harder for our self. So we need to learn to be steady and make right decision especially with investment. I do it perfectly under TradeWiseFX with also getting 50% Bonus for it.

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  3. Everything is possible in slow and steady way, but if we try to fast forward anything and I mean anything then we will only make it harder for our self. So we need to learn to be steady and make right decision especially with investment. I do it perfectly under TradeWiseFX with also getting 50% Bonus for it.

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  4. Everything is possible in slow and steady way, but if we try to fast forward anything and I mean anything then we will only make it harder for our self. So we need to learn to be steady and make right decision especially with investment. I do it perfectly under TradeWiseFX with also getting 50% Bonus for it.

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  5. Really enjoyed reading it and it held my attention all the way through! Keep it up.

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  6. A similar example to reinforce the concept: A friend this week told me, "a man that thinks about their homes' bulbs is a forward-thinking homeowner." They were making light of how I had just shared my intent to plant flower bulbs this month. In the spring, I will have a cascade of vibrant color in my landscaping. And they are perennials, coming back year after year. This investment will outperform in the long run the cheaper mums my wife bought. The mums will offer fall blossoms in the immediate, but die in the winter frost and have to be replaced next spring. Her willingness to only buy flowers at Lowes that already had blossoms on it, and my desire to buy a bag of uneventful bulbs, illustrates the difference between our investment styles and the patience that drives them.

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    Replies
    1. This example is a great way to tie the concepts of patience in investing to most individuals day-to-day lives. Everyone has always heard "patience is a virtue" and both the post and this comment really point to the validity of that statement. Impulsive, quick to action individuals always seem to fail to stop and smell the roses.
      - Madison Marcum

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  8. I am thankful that at the university from which I graduated they educated us once or twice a year on compounding interest. It planted a seed that encouraged me to think about the cost of purchases being greater than the sticker price.

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