Financial Proverbs 1.0

One of the easiest, most effective ways to learn about any subject is by purveying available proverbs for bite-sized snippets of wisdom. I am hoping to share additional proverbs as time goes on with each of these posts featuring around three apiece.

“Wealth is lost in three generations.”

– Chinese Proverb

There is more to being rich than simply having money. Money is one of the ways an investor is able to demonstrate they have played the game successfully and managed to accumulate sizeable rewards for their efforts. However, this proverb speaks to how important it is to have a rich mindset in addition to funds in a bank account.

What is the point of accumulating excess wealth if only to pass it to a future generation which fails to appreciate the toil of building the empire? Raising children in a household with money is one of life’s greatest tasks. No good parent desires to see their children struggle unnecessarily. With that said, struggle is required for triumph. Overcoming setbacks is required for finding oneself. Stress is a requisite quality for meaningful growth.

The only way to properly raise children to appreciate the wealth they may inherit is to allow them to go through trials and tribulations of their own so they can learn how life actually works. Sheltering children can and does impede the maturing process. To properly appreciate money management, one must actually manage cash flow and feel the crunch if money is spent frivolously.

My brother and I agree that one of the best ways to teach a child about money is to have them work a number of different jobs outside of the home growing up so they can learn life lessons. They will meet a number of different characters; good bosses, bad bosses, co-workers, how to deal with clients, and so on. With the money they earn, they can learn to pay themselves first and subsequently how to invest those dollars for maximum gain.

By normalizing the money management process and to see the connection between labour and earnings, a child has the potential to become a skilled steward of wealth. Nevertheless, even under the finest conditions there is no promise that wealth will not be squandered. All one can do is one’s best to raise future generations.

“Don’t put all your eggs in one basket.”

– English Proverb

This time-tested lesson no doubt originated on a farm. Picture a farmer crossing the field with a brimming basket full of the finest eggs on the farm to be sold to eager customers. Then, picture that same farmer stumbling on the root of a tree to find all his eggs tossed about, cracking beyond any hope of salvage.

This is what happens in personal finance when investors place all of their hopes in one or a small selection of common stocks in the hopes of seeing huge gains. If all goes well, all the better. If things go poorly, however, it is very easy for an investor to be wiped out all at once. This proverb cautions against such risky behaviour by promoting diversification or asset allocation. By not focusing too heavily in one area, an investor is able to mitigate risk.

Some people might point to Buffett’s quote that, “Diversification is protection against ignorance. It makes little sense if you know what you’re doing,” in order to suggest diversification is not such an immutable investing principle. However, if we look at Buffett’s actual record of building Berkshire Hathaway (BRK.A) into a mutual fund of its own, we see that he has diversified his company with an impressive cross-section of businesses spanning the economy.

In any event, by not placing all of one’s bets down on one or a few investments, an investor is able to extend their longevity.

“Nothing ventured, nothing gained.”

– Vietnamese Proverb

Investing is fundamentally about betting on what sort of a future an investor thinks there is going to be. Betting on oil companies? You’re better that fossil futures are going to be around for years to come. Betting on a technology company? You’re betting that a particular company will continue to innovate and serve consumers.

By assuming the risk inherent with investing, an investor also gains the potential to earn a profit. Interestingly, many investors leave their money in government bonds in order to avoid the downside potential of a stock market crash. They shelter their money just at the times when it might best be put to use to earn future returns. They fail to see that there is a risk in not venturing, which is the risk of inflation eroding the value of their money.

I have heard some investing commentators suggest that it is possible to invest without taking on risk. These people are usually selling some sort of informational/educational product which they propose can take the guesswork out of investing. There is an obvious conflict of interests there and their words should be taken with a grain of salt. While I agree that risk is a factor of “what you know”, there are simply too many factors to consider to suggest that risk can be entirely removed from the equation. To earn returns beyond what government-backed investments offer, an investor assumes at least some risk.

To get the most out of investing, taking some risks is important. Learn how the game of money works and do not shy away from making decisions. Sitting on the sidelines bears its own costs.

Conclusion

Financial proverbs offer an excellent way to present lessons in a concise fashion. By challenging the reader to figure out what they mean, proverbs provide a sound basis for learning otherwise complicated material.

The proverbs presented today are all cautionary in their own ways. An investor should teach the coming generations the value of a dollar, learn to diversify their holdings adequately, and also understand that risk is part of the process and not something to be avoided.

Thank you for reading.

– Ryan

Do you have any proverbs you enjoy that relate to personal finance? Do you agree with my interpretations here?

Full Disclosure: Not position in any of the stocks mentioned and no intention to initiate a position within the next 72 hours.

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