What the Rich Do Differently

9 October 2018 | AJ Cilliers
 


In a conversation with fellow-writer Ernest Hemingway, F. Scott Fitzgerald was once reputed to have said: "Ernest, the rich are different from us." To which Hemingway apparently replied: "Yes, they have more money."

It turns out that this conversation is the stuff of myth, but Fitzgerald’s point is nevertheless a good one. Those who have had close dealings with the very rich report that they do think and behave differently from the rest of us. What is more, these differences help to explain how the rich got that way in the first place.

While we may not all aspire to riches, that’s not to say that we couldn’t benefit from a bit of inside knowledge. So here are five meaningful ways in which the rich are different from us, and five steps that you can take on your personal road to greater wealth.

1. The rich focus on value

It appears that the rich understand early on that they need to seek out value-maximising opportunities and investments. Even Warren Buffett, the world’s best-known value investor, first made his fortune by owning businesses and managing other people’s money, rather than by investing directly in shares and bonds. Although investing in the stock market can deliver relative wealth to the man in the street, it is likely to be a lengthy process taking decades rather than years. As portfolio manager David Kauffman points out, if people plan to make quick money from the stock market, "that’s not really a plan, it’s a hope."

According to Kauffman (President of Westcourt Capital Corporation), wealthy people invest to protect their capital and earn moderate (inflation matching) returns over time, and also to secure an income stream. The message, then, is that making a million on the stock market is easier when you have a few million to invest in the first place. 

Warren Buffett is a case in point. He started his business career in high school, when he and a friend pooled their resources and bought a pinball machine (an old-fashioned, coin-operated games machine). They convinced a barber to let them install it in his shop, and from the machine earnings bought more machines, until they had eight in various shops. They eventually sold out, and Buffett then invested in shares and another small business. By the age of 26, he had accumulated the equivalent of $1.4 million in today’s money and was on his way to a fortune.

We can learn a valuable lesson from Buffett. While still a schoolboy, he invested in something that provided him with passive income. In other words, Warren wasn’t selling his own time. While he busied himself with other things, players were feeding coins into his machines. 

So, if you are in full-time employment, is there some way you could be earning from a sideline business as you go about your daily duties?  Since Buffett’s school days, the introduction of the internet has created new and inexpensive ways of launching a business. What skills and talents do you have right now that you could leverage off? What books could you read to point you in the right direction? Even if a source of passive income is not possible, could you devote some of your leisure time to increasing your income? Thousands of people have answered ’yes’ to this question, so why not you? 

2. The rich set ambitious goals

This is something that every personal development book will tell you, yet most of us continue to ignore the advice. The reality, however, is that by setting meaningful goals and making plans to achieve them, you set loose a force that borders on magic. The rich know this, while the middle class and poor continue to pooh-pooh the idea.

Some years ago, a close family member of mine was employed in the recruitment industry. After two years in the business, and based on a basic salary and commission, he was earning in the region of R400,000 per year. In a fit of ambition, he then set himself the goal of earning R1.5 million in Year 3. He wrote out a cheque to himself for this amount, and stuck it on the whiteboard above his desk, as a constant reminder of his target. He had no idea, though, as to how this quantum leap in performance was to be achieved.  While I admired his ambition, I secretly believed that he was setting himself up for disappointment.

As it turned out he didn’t hit his target, but he did make just over R1.4 million that year.  He broke his annual target into monthly goals, and realising that doing the same things would lead to similar outcomes, began to explore innovative ways of improving his performance. He read, he spoke to successful people in the industry, he networked. And in the end he not only came very close to reaching his goal, he learned a lot and gained a massive injection of confidence into the bargain. Now, just a few years later, he is a partner in a thriving recruitment business and is going from strength to strength.

Interestingly, there is academic support for the goal-setting process. Research into knowledge-intensive firms shows that goal-setting serves to "frame the consciousness" of employees, even though they have no way of knowing how they are going to achieve their goals. It seems that, by setting ambitious but achievable goals, we send a message to our subconscious mind. Thereafter, we are consciously and sub-consciously on the look-out for the means by which to hit our targets.

The same applies to the strategies we develop to achieve our goals. As we begin to implement a strategy, we very soon discover what works and what doesn’t. We may also find that different, far better strategies emerge, and in unexpected ways. This is known as ’emergent strategy,’ and in the world of uncertainty we inhabit is regarded by experts in the field as far more important than any strategy we can originally conceive. The big thing, though, is to decide on a direction and start moving. A poor strategy that is implemented can be improved, whereas the best strategy in the world is useless if it never sees the light of day.

3. The rich love what they do

Another cliché, but also a truism. Many who aspire to riches plan to grit their teeth and work at something they’re not crazy about, but which they hope will make them money. "Then I’ll sell out at 45 and retire," they say. 

However, speak to most entrepreneurs about their exit strategies and they are far less enthusiastic. What gets them up in the morning and keeps them going is the buzz they get from running their businesses. Why else would Warren Buffett still be turning up at Berkshire Hathaway at the age of 78? In my experience, all of the really successful people I know are passionate about what they do. We should learn from this and follow their example, because if an endeavour is drudgery rather than a pleasure, we are far more likely to pack it in when the going gets tough.

4. The rich do worry about costs

We’ve all heard about the billionaires who drive old cars and have lived in the same modest homes for years. The thing is, despite all of their money, the rich do still pay attention to expenses and try to minimise these whenever possible.

This is an important message for those of us setting out on the road to wealth. Before we earn a cent of extra income, we would do well to remember that any investments we make must come out of our disposable income. Cash in, less cash out on expenses determines this figure, so anything we can do to reduce our cash outflows will grow our nest egg faster.

We don’t have to go to the extremes of a friend of Buffett’s, who only painted the walls of his offices which faced the road, but we should look hard at our expenditure. Most of us waste money on trivialities, and even small amounts can become bigger over time and with the benefit of the compounding effect.

5. The rich aren’t afraid to be different

Don’t be too concerned about the comments and criticisms of others if you march to the beat of a different drum. Warren Buffett was regarded as an oddball when he started managing the investments of a handful of people in 1956. He was based in the backwoods of Omaha rather than on Wall Street, and he adopted a strange and secretive form of investing. But 14 years later he had turned $100,000 into over $100 million, and in doing so had beaten the market in each of those years.

Buffett recognised that, if he did what everyone else did, he would get what everyone else got. To beat the averages he suggests that you measure yourself by your own standards and not by the world’s. So dare to be different, have the strength of your convictions, and people may be writing about you in years to come.

In conclusion

Warren Buffett has featured quite a bit in this article, so we’ll allow him the final words. He suggests that, from the outset, we be clear in our minds what success really means to us. As he points out, "When you get to my age, you’ll measure your success in life by how many of the people you want to love you, actually do love you. That’s the ultimate test of how you’ve lived your life."

Wise words, and ones to remember should we step out on the road to riches.

Recommended reading: Be a Free Range Human.  Escape the 9 to 5, Create a Life You Love and Still Pay the Bills.  Written by Marianne Cantwell and published by Kogan Page (2013, 2014). Not a ’How to get Rich’ book, but packed with practical advice on how to set up money-making businesses, starting with the very small and inexpensive.  One of the best books of this type that I have read; Marianne has been there and done it successfully, and this shines through in the advice she provides.

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aj

AJ Cillers

AJ is an academic and a freelance financial journalist who has written for Sharenet for some 15 years. He spent 25 years as an accountant and financial manager in various South African companies before moving into academia. He has a broad range of interests, including all aspects of business and stock market investing. Apart from a bachelor’s degree in Accounting, AJ holds a Master’s degree in Financial Management. He is also a Fellow of the Chartered Institute of Management Accountants.


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